Halliburton (NYSE:HAL) is an oil services company that has, for years, provided technology that enabled oil and gas exploration companies to find new fields and make the most of their existing properties. It is becoming more of a play on natural gas because it has recently developed promising “green” technologies that could reduce or even eliminate some of the big controversies surrounding the fracking process.

Halliburton is a big global company operating in 80 countries, but nearly half of its revenue (46%) comes from the U.S. The company provides a variety of products and services related to the exploration, drilling and development of both oil and natural gas, and its customers include major international and independent oil companies.

I’m impressed with how strongly committed HAL is to developing new technologies. It has technology centers in Belgium, Canada, India, Singapore, the U.K. and the U.S., and the company has certainly been an innovator in both horizontal drilling and hydraulic fracking.

The latest innovation is what Halliburton calls its “CleanSuite” Technologies, through which the company is endeavoring to make fracking safer. Among the products is the CleanStim Formulation — the cocktail used in the fracking process. According to the company, it uses the same acids and enzymes present in fruits and vegetables, making it one of the most environmentally safe fracture solutions.

In fact, to demonstrate its safety, a Halliburton executive took a drink of it last summer. Some dismissed it as a publicity stunt, and maybe it was a little over the top. Still, environmental groups also gave the company credit for its efforts to make the process safer and more environmentally friendly. Another criticism of fracking is the amount of water required in the process. However, through what they call the “CleanWave” treatment system, water generated as a part of the fracturing process can be treated and reused.

Poised to Grow

The long-term outlook for U.S. natural gas activity is quite bright. Gas is very attractively priced relative to oil, and we will continue to see the transition to more natural gas fleet vehicles — and perhaps even passenger cars — should the government back an effort to increase natural gas storage and fueling stations. International demand for natural gas liquids also will be robust for a long time as the middle class expands internationally.

I like HAL’s growth potential and view it as a solid play on this trend because of its exposure to fracking and natural gas drilling rigs, its efforts to develop clean fracking solutions and the stock is attractively valued.

Just last week, Halliburton reported Q4 and full-year results for 2010. For the quarter, HAL earned $1 a share (before unusual items), up from 94 cents in Q3 and 68 cents the year before. For all of 2011, earnings grew 65% to $3.26 (from $1.97) in 2010. The gains were driven by increased horizontal oil drilling in the U.S., where the oil rig count was up 8%, along with increased activity in the Gulf of Mexico. Internationally, the company benefited from increased drilling in the Middle East and Asia, which offset a politically related slowdown in Africa.

Management also is optimistic about 2012, but the company is moving away from one part of the natural gas industry and toward another.

Let me explain that a bit.

It’s a case of too much of a good thing. Halliburton has considerable earnings leverage to natural gas land drilling activity and pressure pumping activity, and the recent increased drilling activity has created a short-term oversupply, one reason that gas prices are so low. In its earnings report, HAL noted that its natural gas rig count in Q4 declined 2% from the Q3. You may also have heard on that U.S. natural gas giant Chesapeake Energy (NYSE:CHK) will reduce its natural gas rig count by a startling 50%.

I expect we’ll see some additional declines in HAL’s natural gas rig counts in the coming months, but here’s what’s important:

Halliburton is shifting resources from dry natural gas to liquefied natural gas, which remains strong due to high global demand. The transition requires some adjustment, which is what we’re seeing now. Still, management believes that revenue growth in 2012 will outpace rig growth, and it expects higher sales and income from its North American operations. With international markets still firm, earnings of $3.60 a share look very reasonable.

That would be 10% growth in earnings, which is much slower than in 2011, but the market is already pricing this in and views the shift to LNG favorably. In addition, gas prices are expected to stabilize and possibly increase as the year progresses with companies cutting back on production in the short term. OPEC has been doing this for years with oil, and we’ll see the back-and-forth in natural gas production, too. As we’ve talked about, however, longer-term the trends are unmistakable, which is one reason now is a good time to buy HAL.

HAL is off to a decent start to the year, up about 6% so far, slightly ahead of the S&P. The stock moved higher earlier this week after an important ruling in a legal case that has kept a lid on it. BP (NYSE:BP) has sued Halliburton for the 2010 oil spill in the Gulf, claiming it should be responsible for all costs related to the disaster. (There have been claims that Halliburton’s cementing of the well was faulty, and thus the company should bear some of the legal liabilities.) Halliburton believes the terms of the contract with BP indemnifies it from legal liabilities, and that’s basically what a judge ruled recently. It wasn’t a complete victory, however, as HAL could still face punitive damages and/or civil fines.

Conclusion

The legal wrangling could go on for a while, but this week’s ruling was major and, in the end, I don’t see Halliburton taking a significant loss. BP clearly has high legal hurdles to clear and it’s also possible HAL will try to settle and move on. Even an offer as high as $1 billion would amount to just over $1 a share. And I think this would be cheered by the market.

This is a company has a solid long-term history, underappreciated fundamentals, and a favorable valuation at 10 times estimated earnings. Stabilizing natural gas and oil prices (with recent news about the global economy being mostly positive), the shifting of resources to liquefied natural gas and the company’s leadership in moving toward clean fracking solutions should all help drive the stock higher. I’m targeting $55, which would be gains of just about 50% from current prices and would be a reason for 13 times estimated 2013 earnings of $4.20.