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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.
${header:summary}
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 the Middle East and Asia declined from $5.95 million/rig in 2008 to $5.83 million/rig in 2009 as exploration and production efforts were put on hold. In 2010 its ${forecast} again receded to $5.62 million/rig as the recovery in this region lagged that in North America. It bounced back to $6.3 million in 2011 and $7.19 million in 2012. Going forward we expect it to increase at about 2-3% per year with stronger demand for its products and services in the region.
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Trefis considered the following factors for its forecast:
${header:supporting}
- Challenges in maintaining low decline rates
- One of the main challenges facing existing wells in the Middle East is to maintain low decline rates. Investments in these technologies should increase the ${forecast} for Halliburton.
- Halliburton has a comprehensive solution to reduce decline rates seen in wells through infill drilling, multilateral solutions, CO2 injections and wellbore intervention.
- The company aims to triple its revenues from these services by 2014.
- 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 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.
- Extraction of sources such as Heavy Oil and Shale Gas requires extraction technologies that are more capital intensive and require modern technology.
- Saudi Aramco is expected to invest in tight gas over the next 1-2 years.
- Efforts to explore shale gas are also expected in India and China.
- Halliburton expects unconventional sources to be a $15 billion opportunity globally.
- Higher decline rates for unconventional gas will increase the requirement for drilling and completion of new wells.
- Increasing logistical complexity of exploration and production projects
- Development projects are shifting to increasingly remote locations in the region such as Iraq. There are around 200 exploration and production projects worldwide that have a budget in excess of $1 billion.
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Trend towards offshore and deepwater exploration
- 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.
- In the case of natural gas, in 2007 an estimated 81% of gas came from onshore rigs. As these fields start to get depleted, 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.
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- High quality of oil reserves
- A large part of the oil reserves in the Middle East are graded light, extra light or super light. Extraction and production of such reserves is not as technologically intensive as the extraction of heavier sources of crude. This should suppress the increase in the ${forecast} in the region over the short term.
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Large spare capacity of production in the Middle East
- The OPEC holds close to 5 million b/d spare capacity the bulk of which (3.5 Million b/d) is in Saudi Arabia which should act as a buffer between growth in demand and expansion in exploration and production activity.
- Market intervention policies
- Subsidized pricing of natural gas in most countries except Qatar and Iran limits investments in the Natural Gas Sector.
- Resource conservation strategies employed by the OPEC countries limit the exploration potential in these countries.
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.
See more on:
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