Unconventionals, Mature Fields And Deepwater Key To Halliburton’s Growth

Our long-term outlook for the oilfield services sector remains positive, given the fact that it is becoming more challenging and expensive to extract hydrocarbon reserves that increasingly lie in remote locations, unconventional reservoirs, deep waters or fields that are in mature stages of production. We believe that large oilfield services companies such as Halliburton (NYSE:HAL) stand to benefit the most from this trend due to their significant scale, technical expertise and integrated product portfolios that make them the preferred choice among customers. In this note, we take look at some of the factors driving Halliburton’s business in three of the biggest growth areas in the oilfield services space. These areas are unconventional exploration and production, production enhancement services for mature reservoirs, and deepwater exploration and production.

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Unconventional Plays: Recovery In The U.S. and Overseas Expansion

Halliburton is the undisputed market leader in the unconventional plays space in the United States, owing to its extensive exposure to the pressure pumping market. While the pressure pumping product line has been facing some setbacks in the United States due to a glut of horsepower, things have been improving of late. For one, market conditions have been improving with greater absorption of excess capacity occurring on the back of increasing unconventional activity in regions such as the Permian basin. Secondly, Halliburton has been resorting to self-help initiatives such as improving the operational efficiencies of its fracking fleet by installing more efficient equipment and conducting more 24-hour operations. These initiatives have been helping the company bolster margins in North America. Halliburton has also been expanding its unconventional business overseas, bagging early stage contracts and forging strategic alliances for shale exploration in markets such as Saudi Arabia, Australia and China. Working on early stage contracts could prove valuable since they will allow the company to better understand the geologies of different regions and could also help to build relationships that could prove useful over the long term.

Deepwater Production Services Should Help Halliburton Outgrow Market

Deepwater contracts are lucrative to oilfield companies because they have high service intensity, long contract lives (usually up to eight years) ^[1] and also since they allow companies to provide integrated services. Margins are also relatively healthy since the industry is largely concentrated among just a few players. While the market for deepwater services could see some sluggishness in the near term owing to a lack of large exploration successes last year and an increasing focus by oil companies on boosting returns on invested capital, Halliburton has indicated that it expects its deepwater business to outgrow the market by around 25% going forward. This could possibly be due to the fact that the demand mix for deepwater services will be geared towards development and production related services, for which Halliburton has a competitive advantage. Halliburton’s new technology deployments could also give it an edge over the competition. Some of the markets in which the company has been making significant progress include offshore West Africa and the U.S Gulf of Mexico.

Services For Mature Wells Could Prove A Stable Business

Production enhancement from mature wells is likely to be a key revenue driver for oilfield services companies, since as much as 70% of the world’s oil and gas production comes from wells that are in their mature stages. The benefits of enhancing production from mature wells could be immense, given that each percentage-point increase in recovery from a mature well could add an additional two years to the global supply of  hydrocarbons. ^[2] Demand for tertiary recovery services such as enhanced oil recovery is expected to increase going forward as higher oil prices justify the cost of these services. Halliburton could benefit from this trend, since the service periods on these production enhancement contracts are generally longer and the service intensity is also quite high, which would positively impact the company’s earnings. Halliburton has been investing in expanding its capabilities in this technologically underserved market, particularly in the areas of artificial lift and chemicals, and aims to triple its business to unconventional wells to around $9 billion by the year 2016. ^[1]

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1. Halliburton eyes international growth while maintaining its grip on North American unconventional, Morningstar, January 2014 [↩] [↩]
2. Mature Fields, Halliburton [↩]