Halliburton Sees Pocket Of Growth In Africa With Higher Rig Count

Baker Hughes (NYSE:BHI) released its monthly worldwide rig count data last Friday, indicating a marginal drop of about 0.5% since August. The year-over-year worldwide rig count fell significantly by 5% largely due to reduced drilling in North America, Latin America and Asia Pacific. The rig count in Europe and the Middle East, excluding Iraq, remained relatively flat since the last year. However, Africa was a bright spot in the relatively lackluster overall picture. The African rig count grew from 78 rigs to 108 rigs, a 38% increase from last year.

The Baker Hughes rotary rig count is widely accepted as an indicator of business activity for the oilfield service industry, influencing the demand for services such as drilling, completion and production provided by companies such as Baker Hughes, Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB).

Opportunities in Africa

Much of the growth in the continent has come from increased drilling activity in countries such as Libya and Algeria. These regions could provide increasing growth opportunities for firms like Halliburton.

Libya, which holds the largest oil reserves in Africa, has been ravaged by civil war over the last year. The oil and gas industry is the backbone of the Libyan economy, contributing to about 25% of its GDP and 75% of government receipts. During the unrest, the country saw its drilling activity practically vanish as international oil companies and oil field service providers, including Halliburton, suspended their operations. However, this year, oil and gas majors such as BP have begun rapidly resuming operations in Libya and oil production in the country is said to be approaching pre-revolution levels. ^[1]

Although Libya continues to pose significant political and security risks, the resurgent oil and gas industry will require the continued assistance of experienced oil field services companies like Halliburton to efficiently harness the country’s vast hydrocarbon resources.

Algeria Gas Plays Could Help Demand

Algeria, a member of the OPEC, recorded a 31% increase in its rig count since last year on new oil and gas discoveries. Even though Algeria is one of Africa’s largest oil and gas producers, it a relatively under-explored region. The national oil company Sonatrach dominates upstream and downstream activity and foreign firms are required to partner with it to operate in the country.

Algeria boasts of the world’s ninth largest gas reserves and, unlike oil, the production of gas is not constrained by OPEC production quotas. ^[2] In order to invigorate its natural gas industry, the country is beginning to focus on unconventional gas plays like shale gas.

Shale gas exploration is technically challenging and requires new procedures such as hydraulic fracturing and horizontal drilling, which haven’t been broadly deployed in Algeria yet. The country is seeking investments from international oil firms for shale gas exploration, offering tax breaks besides cost and risk sharing agreements. ^[3]

We believe that the increasing shale gas exploration will provide plentiful opportunities for Halliburton, one of the world’s largest providers of fracking and drilling services, and positively impact the company’s revenue per rig and annual average rig count for Europe/Africa/CIS. Halliburton already has a presence in Algeria through its subsidiary HESP. The company recently won a $232 million dollar equipment supply contract from Sonatrach.

We have a price estimate of $43.05 for Halliburton, which is about 28% ahead of the current market price.

Understand how a company’s products impact its stock price at Trefis

1. BP To Resume Drilling In Libya, MarketWatch [↩]
2. Country Analysis:Algeria, EIA [↩]
3. Algeria offers incentives to investors in shale resources, Reuters [↩]