Halliburton Revised To $60 On Upstream Capex Concerns

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Halliburton

Halliburton (NYSE:HAL), the second largest oilfield services provider, has seen its stock price plummet by over 35% over the last 6 months, driven by a decline in crude oil prices and concerns that the company is overpaying to acquire Baker Hughes (NYSE:BHI). While we think that the market reaction to the recent events is overdone, the company does face some significant near-term challenges, relating to a weaker outlook for upstream capital expenditures and also due to potential antitrust and integration risks associated with the Baker Hughes deal. We are revising our price estimate for the company from $70 to about $60, to account for the weaker near-term outlook. Key changes to our valuation model include a lower outlook for the rotary rig count and revenue per rig in 2015 and lower near-term EBITDA margin forecasts across geographic divisions. Our price estimate still represents a 50% upside from the current market price. The company’s currently trades at 9x our FY2015 earnings estimate, well below peers such as Schlumberger (NYSE:SLB).

See Our Full Analysis For Oilfield Service Companies HalliburtonSchlumberger |Baker Hughes

Crude Prices Will Dampen Spending On Oilfield Services

Crude oil prices have declined by over 35% since mid-June, testing the cash flows and reducing capital spending outlooks of oil and gas companies. According to Barclays Capital, the current crude oil price decline has erased over $50 billion in cash flows for oil companies. While most oil and gas players have not provided their capital expenditure budgets for 2015, the few companies – such as ConocoPhillips (NYSE:COP) – that have provided guidance indicate that they will scale back. Activity directed towards shale and tight oil plays is likely to take the biggest cut,  given the higher per-barrel production costs, and Halliburton is likely to face a significant near-term impact owing to its exposure to the pressure pumping product line, from which it derives close to a third of its total revenues. Many shale drillers are highly leveraged, and this could result in a decline in near-term drilling and investment in well development, particularly in newer and less developed plays. However, projects such as ultra-deepwater exploration and mature plays are typically undertaken by larger and more mature oil and gas companies that are cash rich and have long capex planning horizons. While we do not expect to see a large decline in contracting activity or revenues from  projects such as deepwater and unconventionals, customers are likely to have much better leverage in contract negotiations and extensions.

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Long Term Investment Thesis Remains Strong For The Sector

We believe that the long-term fundamentals of the oilfield services sector remain solid. While oil prices are inherently volatile, leading to uneven cash flows for upstream projects and uncertainty in the services industry, we believe that prices are likely to recover in the medium term, on the back of supply-side adjustments and eventual demand growth. More importantly, hydrocarbon production is becoming increasingly expensive with the gradual decline in easily accessible sources such as conventional land and shallow waters reserves. Exploration and production is moving to more complex and challenging frontiers, and oilfield services companies are playing an increasingly crucial role in the upstream value chain, given that they provide the technology and services to help E&P firms undertake complex projects with higher risk profiles. This should eventually allow oilfield services companies to capture greater value from an upside in oil prices, improving shareholder returns.

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