What To Expect From Halliburton In 2015

Halliburton (NYSE:HAL), the second largest oilfield services provider, had a reasonably good 2014. The company did well on the operational and financial front, with revenue and operating earnings growth outpacing the broader industry owing to higher activity in the company’s North American operations and strong deepwater activity. However, we believe that 2015 could be a difficult year for the company, as oil and gas firms are expected to scale back their upstream capital spending owing to plummeting crude oil prices. In this note, we take a look at some of the key developments for Halliburton in 2014 and what to expect in 2015.

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Trefis has a $60 price estimate for Halliburton, which is about 50% ahead of the current market price.

North American Business Drove Earnings In 2014

According to our estimates, Halliburton’s 2014 revenues are set to rise by around 10% year-over-year driven by higher activity in North America and the Eastern Hemisphere, while earnings per share are set to rise by over 25% owing to share repurchases and improvements in operational efficiency. The North American business proved to be one of the company’s key growth drivers during 2014, with revenues from the division rising by around 14% over the first nine months of 2013, while margins have expanded by about 1% to 17.7%. Overall upstream activity in North America remained strong in 2014, with the rotary rig count as of November rising by 10% year-over-year. Completion and production activity was particularly strong, and the pressure pumping product line saw a recovery as demand and pricing picked up, driven by higher unconventional drilling activity in regions such as the Permian basin and higher service intensities for fracking jobs. During Q2, Halliburton noted that fracking stage counts were up by around 20% year-over-year.

Expect A Downturn In Activity In 2015 As Crude Oil Prices Decline

However, the broader oilfield services market looks set to undergo another downturn this year. Benchmark crude oil prices have declined by close to 50% over the last six months, owing to an increase in supply from North American shale fields and Saudi Arabia’s refusal to cut its crude production. The current pricing environment is testing the cash flows of oil and gas companies, putting pressure on their capital spending plans. While most oil and gas players have not provided their capital expenditure budgets for 2015, the few companies – such as ConocoPhillips (NYSE:COP) and Malaysia’s Petronas – that have provided guidance indicate that they will cut back spending by roughly 20%. Activity directed towards shale and tight oil plays is likely to take the biggest cut,  given the higher per-barrel production costs and short planning cycles, and Halliburton is likely to face a significant near-term impact owing to its heavy exposure to the pressure pumping product line. Additionally, many shale operators 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, and we do not expect to see a large decline in contracting activity from  these projects. However, customers are likely to have much better leverage in contract negotiations and extensions, potentially impacting revenues and margins for Halliburton.

All Eyes On Baker Hughes Deal, Potential Regulatory Challenges

Halliburton will be acquiring its smaller rival Baker Hughes in a stock and cash deal, which values Baker Hughes’ equity at $34.6 billion. The deal is expected to close sometime in the second half of this year, subject to the approval of shareholders of both companies and regulators. While Halliburton’s stock has reacted negatively to the deal, we believe that shareholders can benefit meaningfully in the long run, since the equity markets tend to favor larger companies with higher market power, greater geographic presence and a depth of product offerings. That said, the deal could face some regulatory challenges and this is something we will be closely watching, since many key product lines in the industry could be dominated by the combination of Halliburton and Baker Hughes. For instance, the merged company would hold 36% of the pressure pumping market, 48% of the completions equipment and services market and 49% of the market for cementing services. ^[1] Halliburton is looking to placate antitrust concerns by agreeing to sell businesses that generate as much as $7.5 billion in revenues. The company has also agreed to pay Baker Hughes a $3.5 billion fee if the deal terminates due to a failure to obtain the required antitrust clearances.

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1. Halliburton-Baker Hughes Deal Could Face Antitrust Hurdles, WSJ, November 2014 [↩]