VALUATION HIGHLIGHTS

1. North America Rig Services constitute 43% of the Trefis price estimate for Halliburton Company's stock.
2. Middle East / Asia Rig Services constitute 26% of the Trefis price estimate for Halliburton Company's stock.
3. Latin America Rig Services constitute 18% of the Trefis price estimate for Halliburton Company's stock.

WHAT HAS CHANGED?

Halliburton Q4 Snapshot

Halliburton saw its revenues increase 3% year-over-year (y-o-y) to $5.74B, slightly below estimates. Its North American revenue fell 7.2% to $2.42B and international revenue rose to $3.3B, particularly reflecting increased oilfield activity in the Middle East and Africa. Its reported Q4 net income edged higher to $661M, or $0.74/share, from $656M, or $0.72/share, in the year-earlier quarter. The company said margins remained flat sequentially in the U.S. on reduced activity in the region and Mexico. Q4 operating income increased 8.4% y-o-y to $1.06B, with Completion and Production operating income up 8.6% to $716M, and Drilling and Evaluation operating income up 8.5% to $420M.

Note: Halliburton FY'23 ended on December 31, 2023.

Oil Market Overview

Saudi Arabia extended its production cut program by 1 million barrels per day (mb/d) for Q1 2024 in November 2023. This period will also see some other OPEC+ countries reduce production voluntarily. It is estimated that OPEC+ countries' oil production in Q1 2024 will decrease by 0.1 million barrels per day compared to December 2023, excluding Russia and Venezuela. Further, OPEC+ will gradually remove voluntary oil production restrictions in 2024. OPEC+'s actions should lead to an oil market balance in Q2-Q3 2024.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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:

• Halliburton EBITDA Margins: Halliburton's EBITDA margins stood at about 19.8% in 2022, and with oil prices and drilling demand also rising - the figure stood at 22.2% in 2023.
  Halliburton achieved record margins in 2023 and is expected to continue increasing average revenue per rig. The oil market is projected to be balanced in Q2-Q3 2024, leading to a downward revision in the forecast for the average Brent oil price in 2024. Despite a reduction in drilling rigs and oil production volumes in the US, Halliburton's financial results are expected to remain positive in FY'24.
  We forecast EBITDA margins to reach about 23% by the end of the Trefis forecast period. If pricing pressures are put in place and margins stand at about 20%, this would reduce our price estimate for the stock by around 17%. On the other hand, if margins improve to 25%, this would result in an upside of 13% to our price estimate 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.

BUSINESS SUMMARY

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, conducts business in approximately 80 countries, and provides products and services for oil and gas exploration, drilling, and post-drilling services.

SOURCES OF VALUE

We believe the North American division of Halliburton is more valuable than the other geographical divisions primarily because of:

The large market for exploration and production services in North America

North America accounts for approximately 50% of the total rig count published by Baker Hughes. 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.

The push toward unconventional sources

The strong push toward 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. Tight oil plays accounted for 60% of all U.S. crude oil production and shale gas accounted for more than half of the proven reserves of U.S. natural gas.

U.S.Oil Production

In Q4 2023, the average production level in the U.S. amounted to 13.22 mb/d, according to the EIA report. Such a rapid increase in production is due to higher oil production per well, as well as the use of drilled but uncompleted wells (DUCs). EIA forecasts U.S. oil production to be 13.03 mb/d in Q1 2024 and then to rise to 13.18 mb/d by year-end before turning to steady growth in 2025 at a faster pace compared to the 2024 forecast.

Gulf of Mexico Provides A Long-Term Growth Opportunity

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 many 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.

KEY TRENDS

High Oil Prices Pushing Drilling Demand

Oil prices started plummeting in mid-2014 due to the demand-supply mismatch in the global oil markets. This resulted in weaker oilfield service activity throughout 2015 and 2016, as oil and gas companies curtailed upstream spending due to falling cash flows. This severely hit the business of oilfield services companies till 2019. Then, The impact of the COVID-19 pandemic hammered the oil industry in 2020, as governments closed businesses and restricted travel. However, oil prices saw a rebound on the news of the planned rollout of multiple COVID-19 vaccines by the beginning of 2021.

Oil prices rose early in 2022 as a surprising economic rebound drove demand for oil after several months of lockdowns. Secondly, the supply was not able to respond to increased demand as OPEC was probably cautious not to oversupply the market again, and the fact that oil production has long investment cycles. Lastly, the oil prices also increased sharply due to the conflict in Ukraine and sanctions on Russia. In 2023, Crude oil picked on expectations of tighter supply ever since Saudi Arabia and Russia extended their voluntary output cuts of a combined 1.3 million barrels per day (bpd) to the end of the year 2023 - in order to support prices. This pushed oil prices to highs seen in November 2022 in late September before macroeconomic concerns pulled them dramatically lower again. In the latest development, geo-political tension between the Islamist group Hamas and Israel poses one of the most significant risks to oil markets since Russia's invasion of Ukraine in February 2022. While oil flows have not yet been affected, there could be major implications if the conflict escalates. There is a possibility that the U.S. could tighten or step up enforcement of sanctions on Iran, which could further strain an already undersupplied oil market.

Given the growing geopolitical uncertainty due to the Russia-Ukraine and Israel-Hamas war, energy prices are likely to remain elevated in the near term. Thus, demand for oil field services is likely to remain high for a couple of quarters.

Exploration of deepwater and other remote sources of oil and gas

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. Exploiting 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 marginal reduction in the number and size of new finds

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, leading to higher exploration and drilling costs to maintain historical outputs of oil.

The oversupply of natural gas in North America

Natural gas prices 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.

Exploration for unconventional sources in Europe, Latin America, the Middle East, and Asia

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.

Efforts to arrest decline rates in aging fields

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.

Shift toward fully integrated offerings

Halliburton has been veering toward offering more fully integrated offerings, which include an entire suite of services for integrated well construction and intervention. Only SLB has a comparable offering among its competitors, giving Halliburton an edge in this area.