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Investment Overview for Halliburton Company (NYSE:HAL)
${header:potential}
Below are the key drivers of Halliburton's value that present opportunities for upside or downside to the current ${trefisprice}:
North America
- Rig Count in North America: The rig count in North America has risen sharply from 1311 in 2009 to 2302 in 2011. In 2012 the number remained relatively flat. We expect this number to
continue to increase gradually by around 4% every year towards the end of the Trefis forecast period. The increased rig count is a result of the surge in upstream exploration activity for oil, gas and unconventional hydrocarbons which includes shale. Upstream exploration is directly linked to the price of oil and gas as investments are linked to the cash flows of producers such as Exxon Mobil and Shell. In case exploration efforts in North America pick up as a result of a surge in oil and gas prices to an extent that the rig count increases to 3350 or approximately 15% more than our estimate of around 2900 rigs by the end of the Trefis forecast period, there could be an upside of 10% to our estimate of Halliburton's stock. Conversely if the rig count increases at only 1-2% per annum to reach approximately 2,600 rigs by the end of Trefis
forecast period, there could be a downside of around 8% to the ${trefisprice}.
- Revenue per Rig: The revenue per rig for Halliburton in North America has
increased from $3.69 Million/Rig in 2008 to $6.2 Million/Rig in 2011. In 2012, revenue per rig rose to $7.01 million/rig. We expect this figure to grow by around 4% in the long term. A multitude of factors contribute to this trend including the increasing shift towards the exploration of unconventional sources requiring complex technology and the escalation in logistical and technical complexity of explorations in remote locations and deepwater finds. If the forecast revenue figure rises higher by around 10% per annum then there could be an upside of around 33% to our estimate for Halliburton stock. On the other hand, there could a downside of around 10% to ${trefisprice} if the Revenue per Rig increases by a marginal 1% per annum over the Trefis
forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Halliburton at the top of the page.
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Halliburton provides upstream drilling and exploration services to oil and gas production activities required by firms such as Exxon Mobil and National Oil Companies (NOCs) like Saudi Aramco to explore, develop and service their oil resources. The company has an extensive geographical coverage, conducting business in approximately 80 countries and provides products and services for oil and gas exploration, drilling and post-drilling services.
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We believe the North America division of Halliburton is more valuable than the other geographical divisions primarily because of
The large market for exploration and production services in North America
North America accounts for approximately 60% of the total rig count published by Baker Hughes. While the Revenue per Rig is the lowest in this region, the size of the market in terms of the number of rigs exceeds the combined size of the other three geographic divisions of Latin America, Europe / CIS / Africa and the Middle East / Asia.
The push towards unconventional sources
The strong push towards exploiting unconventional sources of hydrocarbons such as shale gas, tar sands and heavy oil in North America increases the potential for additional revenues to Halliburton as exploration for these sources requires complex technology and more intensive processes. The shift has also increased the service intensity of the rigs in North America that should result in higher Revenue per Rig in the region.
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Exploration of deepwater and other remote sources of oil and gas
Increasingly over the past few years, major oil and gas finds have been in deepwater and other remote locations such as the CIS and Iraq. The exploitation of these sources adds tremendous logistical and technical complexity to the exploration projects that translate into revenues for upstream products and services firms such as Halliburton.
The marginal reduction in the number and size of new finds
The IEA estimates that non-OPEC oil production peaked in 2010. This means that future oil and gas finds will get increasingly rarer and the size of the discoveries will decline which will lead to higher exploration and drilling costs to maintain historical outputs of oil.
The oversupply of natural gas in North America
Natural gas prices continue to remain suppressed because of the perceived high storage levels and the oversupply of gas in the market. The lagging demand will translate into lower investments in natural gas exploration in the short term.
New oil and gas discoveries in Brazil and other Latin American countries
7 of the 10 largest oil and gas discoveries of 2008 occurred in Latin America including several multi-billion barrel offshore finds in Brazil. These discoveries are attracting investments from local oil companies such as Petrobas as well as foreign oil majors such as Chevron and Petrochina. Exploration in this region is expected to improve Halliburton's revenue and profit outlook in the region
Exploration for unconventional sources in Europe, Latin America, the Middle East and Asia
Exploration for unconventional sources such as shale and tight gas are expected to pick up in Argentina, Mexico, Poland, China and Saudi Arabia over the 1-5 years resulting in higher revenues and operating profits for Halliburton in these regions.
Industry consolidation and higher service intensity in North America
The recent downturn has resulted in the consolidation of the upstream products and services industry in North America as many smaller players failed to survive the competitive pricing by established players such as Halliburton. In addition to this, the shift towards unconventional activity and higher services intensity favors larger players which should result in better pricing for Halliburton.
Efforts to arrest decline rates in ageing fields
Oil firms are investing in technology to help them reduce the decline rates seen in major fields over their lifetime. Pemex has been engaged in efforts to arrest the decline in its Canterall fields while Saudi Aramco has also made it a priority to reduce the decline in its fields at 2-3% per annum.
Shift towards fully integrated offerings
Approximately 60% of Halliburton's well completions by the end of 2011 will be 'fully integrated offerings' according to company estimates. Among its competitors only Schlumberger has a comparable offering, giving Halliburton an edge in the field.
Trefis Forecast Rationale for Revenue per Rig
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${forecast} gives us the average annual revenues that Halliburton can expect from each rig operational in a region. It is calculated by dividing the revenues of Halliburton in a particular geography by the average number of rigs in that area
Revenues for upstream service and product companies such as Halliburton are directly dependent on investments in oil & gas exploration. Traditionally, investments in this sector are closely tied to the demand and consequentially the price of oil & gas in the market. Halliburton provides a range of products and services for oil and gas exploration including field mapping, drilling, well equipment, software and consulting expertise to existing oil & gas rigs or to setup new rigs.
The mix of the services and products offered varies from project to project and hence we look at the average revenues that Halliburton earns from operational rigs.
${header:historicals}
Halliburton's ${forecast} in North America has been steadily increasing over the last few years. Even in 2009 while its pricing per rig declined in Latin America and the Middle East, its pricing in North America increased significantly from $3.69 million/rig in 2008 to $4.32 million/rig in 2009. In 2010 the ${forecast} touched $4.66 million/rig. The increasing revenue can be explained by the increasing technological and logistical complexity due to the emphasis on unconventional sources in the region. It increase significantly to over $7 million in 2012 and over the long term we expect it to exceed $8.5 million per rig by the end of the Trefis forecast period.
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Halliburton has traditionally maintained a strong pricing structure for its projects in Northern America. We forecast that the ${forecast} will continue to improve as the recovery in crude oil prices boosts oil & gas exploration efforts.
Trefis considered the following factors for its forecast:
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- Increasing costs of exploration and production projects
- Increasing project and technological complexity of new wells will push up exploration costs which in turn will boost revenues for Halliburton.
- Non OPEC oil & gas production is expected to have peaked in 2010 (IEA). This should result in a reduction in the number and size of new discoveries that should drive up marginal development costs.
- From 2008 to 2010, the percentage of horizontal drilling increased from 31% to 51% of the total rigs. Horizontal rigs have higher equipment and servicing costs.
- From 2008 to 2010, the percentage of horizontal drilling increased from 31% to 51% of the total rigs. Horizontal rigs have higher equipment and servicing costs.
- Shift towards unconventional hydrocarbons
- Unconventional resources refer to hydrocarbon sources that are generally not extracted because of the physical and technical challenges associated with extraction and processing. Unconventional sources include gas shales, tight gas, coal bed methane, tar sands, heavy oils and methane hydrates.
- As sources of conventional hydrocarbons become more scarce to find and as the extraction technology improves, unconventional sources will increasingly become viable sources of hydrocarbons.
- Heavy oil and extra-heavy oil have low hydrogen content and higher levels of carbon, sulphur, and heavy metal. These resources require additional processing for refining.
- There have already been considerable efforts towards the extraction of unconventional sources such as shale plays, heavy oil, tar sands in North America. The pricing in this segment is higher due to the advanced technology required to make extraction economical.
- Extraction is generally more capital intensive and requires modern technology increasing project costs.
- Oil Sands projects need the highest upstream investments on a per barrel basis.
- Higher decline rates for unconventional gas will increase the requirement for drilling and completion of new wells.
- Halliburton expects unconventional sources to be a $15 billion opportunity globally.
- New shale drills point to higher cost of drilling wells
- In the four major shale basins, the hydraulic horsepower used to drill wells has increased by 16% to 400%, lateral drilling depths have increased by 31% to 66% and the number of stages have increased by 33% to 367%.
- The overall cost of drilling a well in the shale plays have increased by 52% to 64%.
- The shift towards oil and liquids rich plays should increase the ${forecast} as oil development requires longer laterals, higher number of fracturing stages and complex fluid systems.
- Offshore shifting of natural gas rigs
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In the case of natural gas, in 2007 an estimated 81% of gas came from onshore rigs. As these fields deplete, it is expected that by 2030 around 40% of gas output will be from offshore sources, indicating a long term shift towards offshore sources and hence higher pricing.
- Government thrust towards offshore and deepwater drilling
- The US Government’s efforts to provide incentives to develop offshore and unconventional sources should create a stronger demand for upstream exploration which should boost prices.
- The expected opening of the Gulf of Mexico to further deepwater exploration should increase the count of offshore and deepwater rigs in North America.
- Over the last 10 years, offshore discoveries account for around 50% of all new oil and gas reserves worldwide.
- It is estimated that offshore oil will cater to 33% of the world’s demand by 2025 with deepwater accounting for approximately 10% of global supply.
- Deepwater projects are large scale with hurdle prices of around $40 - $50 per barrel that yield an IRR of 8%-9%.
- Deepwater well services is expected to grow to a $7.2 billion market in 2011.
- Stricter deepwater exploration and safety regulations are expected to increase project costs (and Halliburton’s revenues) by around $5 /barrel.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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