Halliburton: Trends Driving Our $50 Valuation

by Trefis Team
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HAL
Halliburton Company
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Halliburton (NYSE:HAL), one of the world’s largest oilfield service companies, was weighed down by a weak land drilling market in the United States over the last year. However, things seem to be getting better of late. The stock has risen by over 45% year-to-date aided by some positive trends in both the North American land and offshore markets, a resolution of some of the company’s legal woes and a strong outlook for global exploration and production spending. Additionally, the firm has undertaken a series of share-repurchases, buying by as much as 10% of its outstanding common stock over the last few months, a move that we believe signals the management’s confidence in the company’s outlook.

See Our Complete Analysis For Oil Field Services Cos.  HalliburtonSchlumberger |Baker Hughes

Pumping Market Will Be Challenging In Near Term, But Margins Could Be Bolstered By Efficiency Improvement

Pressure pumping is Halliburton’s most important product line accounting for around 40% of its annual revenues. [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 last few quarters as an oversupply of equipment and a volatile natural gas market hit the pricing for pumping services. According to PacWest Consulting Partners, prices for fracking in the United States fell by around 12% in 2012. Although demand has been rising this year, Halliburton still expects pricing for fracking to remain challenging given that there is still some excess capacity in the market. However, the company has been focusing on reducing its costs in order to bolster margins. The company has been implementing its “frac of the future” initiative in order to cut down on both the capital and operational costs of fracking. The company has been installing its fracking fleet with new equipment such as gravity and solar powered sand pumps as well as pumps that can operate on natural gas instead of diesel.

Outlook for Global Capital Spending Looks Strong

Activity in the upstream oil and gas space is largely driven by the outlook for oil prices, which in turn influence the capital expenditures of oil companies. Higher oil prices improve the return on investments for projects and increase the incentive for oil firms to undertake more high risk and challenging plays. Crude oil prices have been witnessing some stability over the last few years with Brent crude prices largely ruling at above $100 per barrel while prices have actually increased to close to $115 per barrel presently. Worldwide oil demand is also expected to see some moderate growth, rising from 91 million barrels per day (MMb/d) in 2013 to close to 93 MMb/d by 2015. Global exploration and production (E&P) capital expenditures are expected to grow by around 18% in 2013 to $850 billion.  Additionally, global drilling and completion spending is expected to grow from roughly $380 billion in 2012 to around $470 billion by 2015. [2]

In the near term, a large portion of spending is likely to come from international markets while North America, Halliburton’s largest market, is expected to remain somewhat lackluster. E&P spending in North America is projected to grow by just about 2% this year. [3]  However, the region has been seeing a greater focus on drilling efficiencies, and this could have a positive overall impact on margins. Over the long run, things are likely to look better in North America, as the United States is expected to become the world’s largest oil producer by the end of this decade. Much of the production growth is expected to come from unconventional resources such as shale oils and tight oils. Since Halliburton is the leader in the U.S. unconventional E&P space, it is well-poised to benefit.

Share Buybacks A Sign Of Confidence In Future Prospects

Halliburton recently closed a Dutch auction which will see the company repurchase around 68 million shares of stock at about $48.5 per share, amounting to a disbursement of nearly $3.3 billion.  Additionally, the company bought around $1 billion worth of its stock during the second quarter of this year. In total, the company has repurchased nearly 10% of its outstanding shares over the past few months. While the repurchases have been funded by borrowings and have led to a downgrade of the company’s debt by some debt ratings agencies, we believe that these deals are a positive development for equity holders since they indicate the management’s confidence in the company’s future earnings prospects and business outlook. [4]

We have a price estimate of around $50 for Halliburton, which is slightly above the current market price.

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Notes:
  1. Howard Weil []
  2. Halliburton Quarterly Update []
  3. The Energy Report []
  4. Moody’s []
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