VALUATION HIGHLIGHTS

1. North America Rig Services constitute 50% of the Trefis price estimate for Halliburton Company's stock.
2. Middle East / Asia Rig Services constitute 24% of the Trefis price estimate for Halliburton Company's stock.
3. Europe / Africa / CIS Rig Services constitute 16% of the Trefis price estimate for Halliburton Company's stock.

WHAT HAS CHANGED?

• Despite subdued rig count figures and broader macroeconomic weakness, the shares of Halliburton have recovered to the levels observed before the March 2020 crash. This can largely be attributed to production curtailments by the OPEC and stable benchmark prices.

• 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.

• As coronavirus cases continue to climb, the demand for gasoline and distillate fuel is expected to remain subdued until the spread is contained.

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 for the North American region have varied considerably. While they stood at about 21% in 2013, they fell to about 16% in 2015, as customers sought better prices amid the weak commodity pricing environment and excess supply in the oilfield services market. It fell further to -12% in 2016 due to persistently low commodity prices. However, the metric improved to levels of about 17% in 2017, as oil prices recovered, with drilling demand also rising.
  However, with the anticipated recovery in commodity prices, we expect margins gradually revert to their historical levels through our forecast period. Accordingly, we forecast EBITDA margins to rise to about 18.5% by the end of the Trefis forecast period. If pricing pressures persist and margins stand at about 16%, this would reduce our price estimate for the stock by around 21%. On the other hand, if margins improve to 25%, this would result in an upside of 9% 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, conducting 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 America 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 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 push towards unconventional sources

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.

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 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.

KEY TRENDS

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. 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 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, which will lead to higher exploration and drilling costs to maintain historical outputs of oil.

The oversupply of natural gas in North America

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.

New oil and gas discoveries in Brazil and other Latin American countries

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 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.

Industry consolidation and higher service intensity in North America

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.

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 towards fully integrated offerings

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.