8/31/11

Halliburton's shares

We have already presented updated pricing models for ConocoPhillips and ExxonMobil as based on the differences between CPI and PPI components. Our share pricing concept was introduced two years ago and predicted share prices for a few energy companies. ConocoPhillips (COP) and Exxon Mobil (XOM) from the S&P 500 list were the biggest and demonstrated almost no difference in the sensitivity to the difference between the core and headline CPIs. Halliburton’s share (HAL) was also modeled showed a dramatically different sensitivity. We made a tentative conclusion that COP and XOM might have a larger return to an investor considering energy stocks.
Basically, we demonstrated that the time history of a share price, p(t), (for example, HAL) could be accurately approximated by a linear function of the difference between the core CPI, cCPI(t), and the headline CPI in the United States. At the initial stage of our research, this difference was found to be the best to predict share prices in the energy subcategory.
Mathematically, a share price, HAL(t), (we use a monthly closing price adjusted for dividends and splits) can be approximated by a linear function of the lagged difference between the core and headline CPI:
HAL(t) = A + BdCPI(t+t1)                                       (1)
where dCPI(t+t1)=cCPI(t+t1)–CPI(t+t1), A and B are empirical constants. In the original model for HAL for the period between 1999 and 2009, A=43, B=-3.5; t is the elapsed time; and t1=0 year is the time delay between the share and the CPI change, i.e. the CPI has a lag behind the share price.
In this article, we test several pricing models for Halliburton, HAL(t), with the same CPI and PPI components tested for ConocoPhillips and ExxonMobil. The set of defining indices includes: the core and headline CPI, the consumer price index of energy, eCPI, and the producer price index of crude petroleum, pPPI, together with the overall PPI. Thus, we test model (1) for HAL(t) using two different differences for the period between 2001 and 2011: 
HAL(t) = A1 + B1(cCPI(t) - eCPI(t))  (2)   
HAL(t) = A2 + B2(pPPI(t) - PPI(t))         (3) 
All coefficients in (1)-(3) were estimates by the least squares for the period between January 2001 and July 2011. As for ConocoPhillips and ExxonMobil, we found no time delay between the share price and defining differences, i.e. t1=0. 
Figures 1 through 3 compare three HAL models. Corresponding coefficients are given in Figure captions. As in our original study, the best model (in sense of RMS residual, s) for the period between 2001 and July 2011 is based on the core and headline CPI (s=$4.18). Almost the same accuracy is associated with the model based on the core and energy CPI (s=$4.44).
At the same time, model (3) based on the producer price indices is the worst (s=$9.31). This may mean that Halliburton does not depend much on the producer price indices. Interestingly, the change in oil price does accurately describe the period of the financial crisis. However, the model fails to predict slow changes in the share price. Currently, the deviation between the observed and predicted prices is $20.

Halliburton’s shares were less sensitive to the change in consumer prices during the financial crisis than those of XOM and COP. However, the overall agreement between the observed and predicted prices is very good for the past ten years. One can expect that the current deviation from the predicted price will disappear in the near future and the observed price will fall down to $40 per share. In the long-run, the expected fall in oil price at a five-year horizon down to $30 per barrel will likely result in a proportional decrease in HAL’s shares.
Figure 1.  The observed HAL price and that predicted from the core and headline CPI.  A=$43, B=-3.4.
Figure 2.  The observed HAL price and that predicted from the core CPI and the consumer price index of energy.  A1=$30, B1=-0.3.
Figure 3.  The observed HAL price and that predicted from the overall PPI and the producer price index of crude petroleum (domestic production).  A2=$25, B2=-0.13. 

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