Are The Commodity Markets On The Road To Recovery?

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At a time when most of the oil and gas companies are trying to cope with uncertainty in the commodity prices, Halliburton (NYSE:HAL), the world’s second largest oilfield services company, believes that the worst downturn of the industry is finally subsiding. Recently at an industry conference, the Houston-based company highlighted that the global rig count had bottomed out in the second quarter of 2016, and the commodity markets are progressing towards the path of recovery over the next 4-5 years. While the volatile nature of the commodities markets makes it difficult to forecast the recovery of these markets, the markets are clearly showing early signs of improvement. For instance, the global and North American rig count (both oil and gas), have gone up by more than 10% and 25%, respectively, in the last three months. As a result, Halliburton’s management remains highly optimistic on the recovery of the commodity markets, particularly in North America.

Global Rig Count Vs. Crude Oil Prices

HAL-Q&A-9-1

Source: Barclays CEO Energy-Power Conference, Halliburton, 6th September 2016

 Assuming a decline rate of 3% on the current production, the company expects a supply gap of 14 million barrels per day (Mbpd) to build in the crude oil market over the next five years. On top of this, the oilfield service contractor anticipates the global oil demand to grow at a rate of 1%-1.5% annually. This would accumulate additional global oil demand of roughly 6 Mbpd by 2020. Based on these numbers, Halliburton foresees the need of almost 20 Mpbd of additional oil supply by the end of this decade, which would drive the recovery of the oil markets over the next few years.

Demand-Supply Estimates Of Crude Oil Markets

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HAL-Q&A-9-2

Source: Barclays CEO Energy-Power Conference, Halliburton, 6th September 2016

Moreover, Halliburton envisions the unconventional oil markets to lead the recovery in the oil markets. This is because these markets can contribute the fastest incremental barrel of oil to the global markets, while offering attractive returns due to continuous efficiency gains. Also, the oilfield services company believes that it is well positioned in these markets, particularly in North America, and will be among the first contractors to benefit from the rebound in these markets. Apart from unconventional markets, the mature fields and deepwater markets will gradually augment the improvement in commodity prices through increased capital expenditure in the later years of this decade.

HAL-Q&A-9-3

In order to take advantage of this anticipated recovery, Halliburton is providing engineered solutions to its customers that will either produce more barrels or reduce its operating cost, which will result in lower cost per BOE for the customers. Further, the company also offers the last mile service, since it has a strong infrastructure in most of the key basin around the world. Since the company provides integrated and custom-made solutions to its customers, unlike its competitors who are moving away from full service execution, it will enjoy a competitive edge over its peers, as, and when, the commodity markets rebound.

Thus, we believe that Halliburton has a positive outlook for the commodity markets, and is well prepared to capitalize on this recovery, by leveraging its strong position in the North American markets.

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Halliburton Company

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