As energy investors are aware, shares of Halliburton (HAL) have been trading near historically low valuations for much of the recent past. I have largely dismissed the discount as being merely a consequence of having a huge amount of U.S. government business due to the Iraq war. Once that is over, or as soon as the Bush Administration was out of office, my thinking went that huge no-bid contracts allowing the company to charge the government anything they wanted would vanish, and Halliburton's financial performance would lag. Hence, the stock is discounting this reality in the marketplace.

With the Halliburton spin-off of its KBR (KBR) subsidiary, all of the sudden we have the division with much of the Iraq war criticism tied to it trading on its own. After Halliburton disperses its majority stake to shareholders, Halliburton will look a lot more like a leading oil services company, and much less like a company being propped up by the Bush Administration, and more specifically, former CEO Dick Cheney. Interestingly, in 2006 KBR represented 43% of sales for HAL, but only 7% of operating income.

The KBR-free Halliburton would once again be a good comparable for Schlumberger (SLB), the other large services company that, before the war in Iraq, traded very similarly on Wall Street. With such a scenario unfolding, there might not be a good reason to have a such a wide valuation disparity between the two largest energy services firms.

Both stocks have similar dividend yields of around 1% per year. HAL trades at 12.3 times 2007 profit forecasts, versus 16.8 times for Schlumberger. As much as I wanted to come to another conclusion, based on political views of the Iraq war, I must admit that the stock is cheap. A purely long play on HAL, or a paired trade with a short Schlumberger position to play a possible narrowing of the valuation gap, could be attractive.

Full Disclosure: No positions in the companies mentioned