VALUATION HIGHLIGHTS

1. North America Rig Services constitute 49% of the Trefis price estimate for Halliburton Company's stock.
2. Middle East / Asia Rig Services constitute 23% of the Trefis price estimate for Halliburton Company's stock.
3. Latin America Rig Services constitute 15% of the Trefis price estimate for Halliburton Company's stock.

WHAT HAS CHANGED?

Halliburton Saw Mixed Q4 Results

Halliburton saw its revenues jumping 30% year-over-year (y-o-y) to $5.58 billion but missed estimates by $10 million. Its net income fell to $656 million, or $0.72 per share from $824 million, or $0.92 per share, in the year-earlier period, but beat the analyst expectation by 5 cents. The company utilized $409 million in tax benefits during the comparative period which explains the bottom line coming higher in Q4 2021. It should be noted that the operating margins expanded significantly from 12.9% in Q4 2021 to 17.5% in Q4 2022. HAL's Q4 revenues in the completion and production segment jumped 35% y-o-y to $3.2 billion, while the drilling and evaluation segment gained 25% to $2.4 bil. By geographic region, North American revenue surged 46% y-o-y to $2.6B, Latin America revenues grew 41% y-o-y to $945 million, and Middle East/Asia revenues increased 25% to $1.4B. Europe/Africa/CIS region saw a 10% decline in revenues due to the company's exit from Russia.

Halliburton possesses strong positions to benefit from the current high crude oil prices cycle which is expected to last for some time due to underinvestment in oil and gas upstream CAPEX in recent years. The company was one of the top-performing oilfield service firms in 2022. Its share price appreciated more than 70% during the calendar year.

Note: Halliburton FY'22 ended on December 31, 2022.

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 17.9% in 2021, and with oils prices and drilling demand also rising - the figure stood at 19.8% in 2022.
  With the expected rise in oil prices to continue over the near term, we expect margins to grow to 20.6% in FY2023 and then stabilize over our forecast period. Accordingly, we forecast EBITDA margins to reach about 21% 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 8%. On the other hand, if margins improve to 25%, this would result in an upside of 22% 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.

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. But the 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 sharply in early 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, oil prices also increased sharply due to the conflict in Ukraine and sanctions on Russia. While oil prices saw a downward trend through July and mid-September, it has been rising again since October as OPEC+ agreed to reduce oil production by 2 million barrels a day, the first proposed target reduction since the Covid-19 pandemic. The organization is likely looking to raise oil prices in the face of slowing global economic growth. Given the growing geopolitical uncertainty due to the Russia-Ukraine war, energy prices are likely to remain high in 2023. 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. 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.

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. Among its competitors, only SLB has a comparable offering, giving Halliburton an edge in this area.