• Assisted by high benchmark prices, rig count numbers in the U.S. have observed a strong uptick as the commercial crude oil inventories continue to decline. Per EIA, production in the U.S., OPEC+ nations, and other regions is likely to outpace demand in the coming quarters. Thus, oil field service firms including Halliburton are expected to observe top-line recovery and improving cash flows. However, EIA expects Brent to average at $68/bbl in 2022, nearly 20% below current levels, putting pressure on the company’s long-term earnings.
• With upstream companies continuing to curtail capital and operational expenses in 2021, oil field service firms including Halliburton have been shifting focus towards their software businesses.
• In order to enhance its digital solutions offerings, Halliburton partnered with Microsoft and Accenture last year. As the company incurred $3.8 billion of impairment charges in 2020, its digital business is expected to be the key revenue and earnings driver in 2021.
Below are the key drivers of Halliburton’s value that present opportunities for upside or downside to the current Trefis price estimate for Halliburton Company's stock:
For additional details, select a driver above or select a division from the interactive Trefis split for Halliburton at the top of the page.
Halliburton provides upstream drilling and exploration services to oil and gas production activities required by firms such as Exxon Mobil and National Oil Companies (NOCs) like Saudi Aramco to explore, develop, and service their oil resources. The company has extensive geographical coverage, conducting business in approximately 80 countries and provides products and services for oil and gas exploration, drilling, and post-drilling services.
We believe the North America division of Halliburton is more valuable than the other geographical divisions primarily because of:
North America accounts for approximately 46% of the total rig count published by Baker Hughes (as of Aug 2019). While the Revenue per Rig is the lowest in this region, the size of the market in terms of the number of rigs exceeds the combined size of the other three geographic divisions of Latin America, Europe / CIS / Africa, and the Middle East / Asia. Production growth in North America has been strong over the past few years. Once the commodity markets rebound, the North American markets are likely to be the first to rebound, providing a vast potential for production growth.
The strong push towards exploiting unconventional sources of hydrocarbons such as shale gas, tar sands, and heavy oil in North America increases the potential for additional revenues to Halliburton as exploration for these sources requires complex technology and more intensive processes. The shift has also increased the service intensity of the rigs in North America, which should result in higher Revenue per Rig in the region. As of August 2019, tight oil plays accounted for 60% of all U.S. crude oil production. Shale gas accounted for more than half of the proven reserves of U.S. natural gas at the end of 2016.
A large portion of the Gulf of Mexico remains under-tapped. It could hold a total of around 48 billion barrels of oil compared to the 13 billion barrels of reserves estimated for onshore, as well as coastal oilfields. Since much of these untapped resources are located in deep and ultra-deep waters, they will call for a high level of technical expertise as well as a higher service intensity translating into more activity for oilfield services companies.
Increasingly over the past few years, significant oil and gas finds have been in deepwater and other remote locations such as the CIS and Iraq. The exploitation of these sources adds tremendous logistical and technical complexity to the exploration projects that translate into revenues for upstream products and services firms such as Halliburton.
The IEA estimates that non-OPEC oil production peaked in 2010. This means that future oil and gas finds will get increasingly rarer, and the size of the discoveries will decline, which will lead to higher exploration and drilling costs to maintain historical outputs of oil.
Natural gas prices continue to remain suppressed because of the perceived high storage levels and the oversupply of gas in the market. The lagging demand will translate into lower investments in natural gas exploration in the short term.
Seven of the ten largest oil and gas discoveries of 2008 occurred in Latin America, including several multi-billion-barrel offshore finds in Brazil. These discoveries are attracting investments from local oil companies, such as Petrobras, as well as foreign oil majors, such as Chevron and Petrochina. Exploration in this region is expected to improve Halliburton’s revenue and profit outlook.
Exploration for unconventional sources such as shale and tight gas are expected to pick up in Argentina, Mexico, Poland, China, and Saudi Arabia over the next 1-5 years resulting in higher revenues and operating profits for Halliburton in these regions.
The recent downturn has resulted in the consolidation of the upstream products and services industry in North America, as many smaller players failed to survive the competitive pricing by established players such as Halliburton. In addition to this, the shift towards unconventional activity and higher services intensity (higher stage counts, sand volumes) favors larger players, which should result in better pricing for Halliburton.
Oil firms are investing in technology to help them reduce the decline rates seen in major fields over their lifetime. Pemex has been engaged in efforts to arrest the decline in its Canterall fields, while Saudi Aramco has also made it a priority to reduce the decline in its fields at 2-3% per annum.
Halliburton has been veering towards offering more fully integrated offerings, which include an entire suite of services for integrated well construction and intervention. Among its competitors, only Schlumberger has a comparable offering, giving Halliburton an edge in this area.