Trends Lifting Halliburton’s Pressure Pumping Business

Pressure pumping remains Halliburton’s (NYSE:HAL) single most important product line accounting for around 40% of the company’s annual sales. ^[1] Pressure pumping services include hydraulic fracturing which is used to produce oil and gas from shale wells. This business, which is largely centered in the North American market, has been one of the key factors weighing on the company’s margins over the past few quarters as the oversupply of equipment and a volatile natural gas market hit the pricing for pumping services. Here we take a brief look at some of the trends behind Halliburton’s pressure pumping business and how they could impact the company going forward.

See Our Complete Analysis For Halliburton| Schlumberger |Baker Hughes

Near Term Outlook Could Remain Challenging

Halliburton is the single largest player in the fracking space in the United States owning around 15% of total horsepower in the market. ^[2] While Halliburton doesn’t provide a breakdown of the results of its pressure pumping division, the Completion and Production division which also includes pressure pumping has seen its operating margins fall to about 16% for the first six months of this year from around 22% last year. This margin pressure could continue for the rest of the year as well. According to PacWest Consulting Partners, prices for fracking services in the United States fell by around 12% last year and could fall by around 6% this year as well. Additionally, exploration and production spending in North America is expected to be quite sluggish this year growing by just about 2%. ^[3]

Based on preliminary data from Baker Hughes, the number of new oil and gas wells spud during the first half of the year has declined by around 7% since 2012 to around 17,300. Additionally, the decline in the number of new wells in basins focused on natural gas such as the Barnett and the Marcellus shale has been quite sharp although there has been an uptrend in the number of wells in liquids rich basins such as the Eagle Ford shale. ^[4] Since shale gas wells typically require more pumping capacity compared to liquid wells, the shifting trend towards oil drilling could have a negative impact on the demand for pumping services.

Improving Efficiencies, Opportunity In International Unconventional Plays

Given Halliburton’s large exposure to the fracking space, it has been focusing on improving efficiencies and introducing new processes and technologies across its product lines. For instance, the company rolled out its “frac of the future” program to cut down on both capital and operational costs of fracking. Under this program, the company will fit its fracking fleet new equipment such as pumps that can operate on natural gas instead of diesel and will also install gravity and solar-powered sand pumps. These new deployments should cut down maintenance costs and reduce labor and operational costs. The higher efficiency is likely to help reduce the volume of equipment needed on location by an around 25%, reducing the costs of delivering the fracturing fleet. The company has already transitioned around 10% of its fleet to this new setup and expects the number to grow to about 20% by the end of this year. ^[5]

The international market for unconventional plays such as shale gas remains relatively small and could provide a significant growth opportunity for fracking majors like Halliburton. The global market for hydraulic fracturing is expected to touch $36 billion this year but spending outside of North America is expected to account for less than 15% of this number. ((Bloomberg)) Recently, Halliburton expanded its service footprint catering to some of the first commercial unconventional wells in Australia and China and has also stepped up unconventional plays business in markets such as Saudi Arabia and Argentina. Signing early stage contracts could prove valuable as it will allow Halliburton to better understand geologies of different regions as well as help forge relationships.

We have a price estimate of around $50 for Halliburton, which is almost in line with the current market price.

Understand how a company’s products impact its stock price on Trefis

1. Howard Weil [↩]
2. Bloomberg [↩]
3. The Energy Report [↩]
4. Baker Hughes Well Count [↩]
5. Seeking Alpha [↩]