Halliburton Heads to $60 on Gusher of Exploration & Production Demand

Halliburton (NYSE:HAL) announced its Q2 earnings on the 18th of July. ^[1] Revenues for the quarter grew by over 35% year over year and 12.3% sequentially. The growth was primarily driven by higher pricing and utilization of its products and services in the United States where activity in unconventional plays and liquid rich basins is driving demand. Analysts now expect Exploration and Production spending in the U.S. to jump by over 22% in 2011 over the previous year. ^[2] With drilling in unconventional plays becoming increasingly more complex, Halliburton and its competitors such as Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI) and Weatherford International (NYSE:WFI) will see a surge in demand which will show up in earnings.

We have revised our price estimate for Halliburton to $59.50, which is a 10% premium over its current market price. Our revision takes into account the improvement in EBITDA margins.

Strong pricing rebound in North America

Much of the jump in Halliburton’s revenues is due to the 16% rise in oilfield services revenues from North America and about 6% of this growth came from increased drilling activity. Revenues increased in both the drilling and evaluation as the completion and production segments of its business. Halliburton also increased its operating margins significantly in the U.S. The company attributes some of its success to its strategy of targeting liquid rich basins and the higher adoption of its integrated solutions among customers. High crude oil prices have driven players to seek liquid hydrocarbon deposits found in shale plays such as the Eagleford Basin.

Halliburton expects that its clients will be spurred by increased price of crude oil, stronger cash flows and better access to financial resources to sustain the demand for oilfield services in North America.

International revenues recovering as well

International income for Halliburton increased by 8% sequentially with the operating income jumping by 18%. The growth was attributed to the seasonal improvement in exploration and production activity in the Russia and the North Sea as well as higher demand for its services in Latin America and Asia. The company reported that international recovery was being impeded by the Libyan situation, project delays in Iraq and sluggish demand in the UK and in Algeria. However it affirmed that its performance in these markets would improve with stabilization in pricing and demand volume.

Halliburton also highlighted its recent success in the shale extraction efforts in Poland where it won a 3 year deal to provide integrated services for Chevron (NYSE:CVX). The oilfield services provider will provide directional drilling, mud logging, cementing, coiled tubing, slickline, well testing, hydraulic fracturing, and completion equipment and services. This marks a significant step for Halliburton as it has been aiming to expand its leadership in the North America unconventionals sector to other geographies. It also fits with the company’s broader strategy of focusing on the niche unconventionals, deepwater and mature wells sectors.

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1. Halliburton Announces Second Quarter Earnings of $0.81 Per Diluted Share, Excluding Employee Separation Costs, Halliburton [↩]
2. Halliburton Profit Rises on Oil Spending Growth, Bloomberg [↩]