Fracking Regulation Could Benefit Halliburton & Schlumberger

+17.88%
Upside
37.71
Market
44.45
Trefis
HAL: Halliburton logo
HAL
Halliburton

Oil exploration and production services firms such as Halliburton (NYSE HAL), Schlumberger (NYSE:SLB) and Baker Hughes (NYSE: BHI) could get a boost as regulatory efforts to address environmental concerns related to commonly used fracking techniques intensify. Oil & gas majors like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) are facing pressure to respond to critics on environmental safety of the practices they employ in the fracking process. (See Exxon May Have to Address Fracking-Related Concerns Soon) This could translate to additional demand for specialized services of companies like Halliburton and Schlumberger that have developed cleaner methods of shale extraction. 

We have a price estimate $57.20 for Halliburton, which is 10-15% ahead of the current market price.

The fracking process is essential for shale extraction

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One of the primary hurdles to extraction of oil and gas from shale reserves is that the low permeability of shale rock impedes the oil and gas from flowing into well bores. [1] For the formation of flow pathways, it is necessary to create artificial fracture around the well bore. The process of hydraulic fracturing (or fracking in short) achieves this by flushing the rock with water mixed with chemicals and sand to break it apart. Although fracking technologies have been around for more than 50 years, recent advances in the field have played a significant role in making the extraction of oil and natural gas from shale deposits feasible while also raising questions on the implications of these technologies on the environment. [2]

How oil service providers gain?

Sensing the significant opportunity for cleaner fracking technology, Halliburton – the leading player in hydraulic fracturing [3] has developed a whole line of environmentally safe fracking technologies called ‘CleanSuite’. These technologies have already seen adoption in North Louisiana. [4] Baker Hughes has also launched its own set of environmentally safe fracking fluids and additives under the name ‘BJ SmartCare’. [5] Schlumberger is pushing its suppliers for greater disclosure of the chemicals used in its products to dispel the fears associated with their usage.

Given the pressure for cleaner and safer fracking techniques, companies drilling for oil & gas in shale deposits may have to hasten the adoption of these newer technologies. This is likely to result in higher revenue per rig earnings for providers of fracking services. Since most shale extraction activity is presently concentrated in North America, the impact of these developments may be first felt in the earnings of oilfield service providers in this geography.

The North American division accounts for approximately 64% of the $57.20 price estimate for Halliburton. Baker Hughes has close to 60% of its $89.20 trefis price estimate come from its North American operations. Schlumberger, however, has a more diversified revenue stream, with North America contributing  only around 30% of our $105 price estimate for its stock. The Trefis price estimates for Baker Hughes and Schlumberger stocks are at a 20-22% premium over their market price.

See our full analysis for Halliburton | Schlumberger | Baker Hughes

https://www.trefis.com/company#/XOM/n-0630?from=search&article=60240
Notes:
  1. Shale Gas Information, American Exploration Corp []
  2. Baffled About Fracking? You’re Not Alone, NY Times []
  3. Full Disclosure: Schlumberger, Hydraulic Fracking and the Public Access Debate, BNet []
  4. Press Release, Halliburton []
  5. Baker Hughes launches green fracking fluid systems, Arabian Oil and Gas []