Halliburton Will Benefit From Growing Deepwater Production Spending, North American Growth

Halliburton (NYSE:HAL), one of the world’s largest oilfield services companies, has seen its stock price rise by about 30% in the last few months driven in part by its recent share repurchases as well as a decision to raise dividends. In addition the increasing shareholder distributions, we believe there are some key fundamental factors that are driving the company’s stock price. These include an increase in global drilling and completion spending, a better outlook for North American activity for 2014 and the company’s strong performance in the deepwater sector, which we believe could be a key driver for the company’s earnings growth.

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North American Capital Spending Will Grow Next Year

Global upstream activity has been strong this year, driven by relatively attractive crude oil prices which have allowed oil and gas companies to undertake more challenging and risky plays. For 2013, international upstream capital spending is expected to see close to double digit growth, although growth in North American spending is forecast to remain somewhat sluggish at around 2% owing to relatively volatile natural gas prices and weaker gas based drilling. ^[1] This has been somewhat of a concern for Halliburton, since it derives more than half its revenues from North America. However, North American drilling and completion spending is expected to improve in 2014, with service intensity for drilling and pressure pumping increasing as companies drill longer lateral wells while also increasing the number of fracking stages for wells. ^[2] Additionally, the region has been witnessing an increasing focus on drilling efficiencies, and this could have a positive overall impact on margins. Things look reasonably bright over the longer term as well, since the United States is expected to become the world’s largest oil producer before the end of this decade.

Halliburton’s Deepwater Business Could Grow Faster Than The Market

The deepwater drilling market is one of the fastest growing segments in the global upstream oil and gas industry. In 2012, around 77% of new offshore discoveries (by volumes) came from deepwater and ultra-deepwater plays.  ((Transocean Presentation)) While companies don’t disclose detailed financials for deepwater services, they are believed to be relatively lucrative given the sophisticated technologies and risks involved.  Halliburton’s deepwater revenues have been growing at a rate of around 31% over the last two years, significantly exceeding the industry growth rate of around 13%.

Things look quite promising going forward as well. According to consulting firm Wood Mackenzie, the number of deepwater exploration, appraisal, and development wells drilled each year is likely to increase from around 500 per year in 2012 to close to 1,250 per year in 2022 and the overall deepwater market is expected to grow at a CAGR of around 11% over the next five years. Halliburton’s deepwater business could continue to grow faster than the market, since spending on deepwater development services, in which Halliburton has a competitive advantage, is likely to outpace exploration directed spending. ^[3]

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1. The Energy Report [↩]
2. Reuters [↩]
3. Halliburton Analysts Day Transcripts [↩]