What’s Driving Halliburton’s Deepwater Business?

Halliburton (NYSE:HAL), the world’s second largest oilfield services company, has been focusing on three key sectors of the oilfield services market – unconventional plays, deepwater and mature fields – to drive growth. The company notes that these areas accounted for over 60% of its revenues in 2014. The focus is in line with the broader oil and gas industry, which has seen a decline in easily accessible onshore and shallow water reserves, pushing exploration and production activity to deeper waters and to areas such as shale on land. In this note, we take a look at Halliburton’s deepwater business and where it is headed.

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Why The Deepwater Business Is Attractive

Providing services to deepwater plays is attractive to oilfield service companies since deepwater wells have a higher service intensity compared to traditional shallow water and onshore wells, requiring more operations to drill, develop and produce hydrocarbons. Additionally, deepwater contracts have a longer duration compared to land contracts (typically about 8 years), allowing companies more visibility. ^[1] Deepwater contracts also enable oilfield service companies to provide integrated services, allowing them to cross sell products and services to operators. While Halliburton does not break out the financials for its deepwater business, we believe that margins are likely to be above the company average, given that the industry is concentrated among a few players who have the technical expertise and capital required to deliver sophisticated services.

Halliburton Is Outperforming The Deepwater Market

Halliburton’s deepwater business has been outgrowing the broader market, growing at a CAGR of around 31% over the last 2 years, compared to around 13% for the broader industry. Although the market for deepwater services could see some sluggishness in the near term owing to a dearth of large exploration successes last year, as well as an increasing focus by oil companies on boosting returns on invested capital, Halliburton still expects its deepwater business to outgrow the market by around 25% going forward. This could be due to multiple reasons. Firstly, the demand mix for deepwater services is expected to be geared towards development and production activity, for which Halliburton has a competitive edge. For instance, consulting firm Wood Mackenzie estimates that the market for deepwater exploration will grow at a rate of around 4% between 2013 and 2018, while development-related services are expected to grow at around 13%. ^[2] Additionally, the firm could benefit from its leading position in areas such as geosciences and high-temperature and high-pressure solutions to gain market share.

Africa, Latin America Could Drive Growth

Much of Halliburton’s growth in the deepwater market could come from regions such as Sub-Saharan Africa and Latin America. For instance, markets including Angola and Nigeria have been seeing strong offshore rig activity of late.  In Angola, Halliburton has been performing more subsea testing and wireline services and could see healthy demand for its seismic, testing, and drilling services in the near term. Brazil is another market that could provide growth opportunities for the company. While oilfield service contractors have been facing some headwinds in Brazil over the last year, as state-run Petrobras (NYSE:PBR) scaled back drilling activity in the offshore pre-salt fields owing to strong flow rates from existing wells and funding issues, the long term prospects for deepwater activity in the country remain strong. The country’s recoverable oil and gas reserves from the pre-salt region could stand at as much as 50 billion barrels of oil equivalent (boe) ^[3] and Petrobras is expected to spend over $150 billion on upstream capex in the next five years. Halliburton has edged out peers such as Baker Hughes (NYSE:BHI) to win major contracts in the past and could stand to benefit meaningfully as activity picks up.

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1. Halliburton eyes international growth while maintaining its grip on North American unconventional, Morningstar, January 2014 [↩]
2. Deepwater Analysts Day Presentation, Halliburton, November 2013 [↩]
3. Analysis Brief, U.S. EIA [↩]