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Investment Overview for Halliburton Company (NYSE:HAL)
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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 Annual Average Rig Count in Middle East / Asia
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The ${forecast} is the annual average of the weekly count of the number of operational Rigs in the Region.
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Global oil and gas exploration is driven by oil & gas prices. The Annual Average Rig Count in Middle East / Asia touched 532 in 2008 as oil prices increased to record levels. In 2009, however as prices declined the count reached 495 in 2009 before recovering to 534 in 2010. The rig count grew further in 2011 to touch 549, as oil prices remained above $100 through much of the year.
The rig count gives a strong indication of investments in upstream activity. As oil prices reached record levels in 2008, nearly $500 billion were poured into the sector resulting in many new rigs coming into operation as it became economically viable to exploit remote resources. As oil prices declined due to the recession, investments were cut by around 19% in 2009 from $524 billion in 2008 to $442 billion in 2009 (IEA). Nearly 20 upstream large scale projects with a capacity of 2 mb/d and 9 bcm of gas output were put on hold from October 2008. However, with the economic recovery taking hold, there was a strong rebound in demand for oil with demand surging by 2.8 mb/d in 2010.
We expect the Annual Average Rig Count in Middle East / Asia to grow at about 4-5% in the long term.
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Trefis considered the following factors for its forecast:
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- Scope for further growth in the ${forecast}
- According to the IEA, the Middle East’s share of the global oil supply will increase from the present 44% to 52% in 2030.
- The Middle East has around 60% of the world’s proven reserves that are also financially the most attractive as they have low development, operational and refining costs compared to oil reserves from the other parts of the world.
- The IEA forecasts that upstream exploration should see annual investments of around $450 billion till 2030 for supply to keep pace with the growth in demand. It is estimated that approximately 50% of the conventional oil production needed by 2020 is yet to developed or discovered.
- Saudi Arabia is looking to explore more regions and plans to increase its rig count from 92 to 118 by the end of 2011.
- More fields are also opening up in Iraq, as the country aims to ramp up its oil production over the next few years.
- It is estimated that approximately 50% of the conventional oil production needed by 2020 is yet to developed or discovered. By 2035 this figure is expected to increase to 70% indicating a tremendous upside potential for exploration products and the services industry which in turn will boost the rig count.
- Increasing exploration in natural gas
- Qatar is expected to double its natural gas production by 2015. Rig count growth is also expected in Iran where only 5% of the total gas reserves have been produced to date.
- Gas production has also increased significantly in China.
- IEA projections indicate that the demand for gas is expected to increase by 1.4 - 1.6% per annum till 2035. Other forecasts estimate annual growth rates of around 2.0% with non-OECD economies contributing the most to that growth.
- Following the Japan nuclear crisis, countries may opt for an energy mix that would bolster demand for natural gas further increasing the rig count.
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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