Halliburton (NYSE:HAL), one of the world’s largest oilfield services companies, has had a reasonably good 2013. The company’s stock price has risen by over 45% this year, aided by a strong international drilling activity, improving operational efficiencies and offshore activity in North America. In this note, we take a look at some of the factors that we believe will drive the company’s performance in 2014, as well as some of the trends that we will be tracking.
Trefis has a $52 price estimate for Halliburton, which is in line with company’s current market price.
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Strong Global Spending And A Resurgent North America
Global upstream activity is expected to be strong next year, driven by high crude oil prices, which have allowed oil and gas companies to undertake more challenging and risky plays. According to the Global 2014 E&P Spending Outlook published by Barclays in early December, global exploration and production spending is expected to grow by around 6.1% to a record $723 billion in 2014.  The overall spending mix is expected to move away from large infrastructure projects towards oilfield services such as drilling, evaluation and completions, translating into better business for large oilfield service companies such as Halliburton.  Additionally, Halliburton should benefit from resurgent spending in its principal market, North America. After a relatively sluggish 2013, where spending grew by just about 2%, the region could see capital expenditures rise by as much as 7% to around $156 billion in 2014.
Improving Land Efficiencies And Higher Service Intensity Could Aid Margins
A significant part of North American exploration and production spending is directed at shale plays, and a higher service intensity and better efficiencies in these plays could bode well for Halliburton’s revenues and margins. Production from shale wells typically starts off strong, after which there is a relatively rapid decline when compared to conventional oil wells.  This could translate to higher service intensity for drilling and pressure pumping services, as oil companies drill more longer lateral wells while also increasing the number of fracking stages for wells in order to maintain their production output. For instance, Halliburton has indicated that it has seen the stage count per well rise by around 15% to 20% over the last year in the Marcellus and Eagle ford shales.
Additionally, North America is also likely to see a continuing focus on efficiencies. On the drilling front, the adoption of pad drilling has meant that oil and gas companies are able to cut down on their drilling cycle times; drilling more wells using a single rig. On the production side, Halliburton has been focusing on improving the efficiency of its pressure pumping business, which accounts for as much as 40% of the company’s total revenues. The company has been fitting its fracking fleet with more efficient equipment, as well as operating a larger portion of its pumping fleet on 24-hour shifts. These improvements should help to cut down on manpower as well as operation and maintenance costs.
Deepwater Business Should Continue To Outperform
The deepwater drilling market is one of the fastest growing segments in the global upstream oil and gas space. In 2012, around 77% of new offshore discoveries (by volumes) came from deepwater and ultra-deepwater plays. ((Transocean Presentation)) While Halliburton does not disclose detailed financials for its deepwater services, they are believed to be lucrative given the sophisticated technologies and risks involved. Halliburton’s deepwater revenues have been growing at a rate of around 31% over the last two years, significantly exceeding the industry growth rate of around 13%, and we believe that things could continue to remain strong going forward as well.
According to consulting firm Wood Mackenzie, the number of deepwater exploration, appraisal, and development wells drilled each year is likely to increase from around 500 per year in 2012 to close to 1,250 per year in 2022. In tandem, the overall deepwater market is expected to grow at a CAGR of around 11% over the next five years. Halliburton’s deepwater business should continue to grow faster than the broader market, since spending on deepwater development services, in which Halliburton has a competitive edge, is likely to outpace exploration directed spending. 
Watching For Progress In Global Unconventional Plays
Halliburton is recognized as the leader in services for unconventional plays across North America. The international market for unconventional plays on the other hand remains nascent and provides a promising growth opportunity for the company. Over the last year or so, Halliburton has expanded its service footprint, catering to some of the first commercial unconventional wells in Australia and China. It has also stepped up its unconventional plays business in markets like Saudi Arabia, Mexico and Argentina. While we do not expect the progress to be rapid, since these countries are only drilling exploratory wells and full scale commercial production could still be several years away, we believe that it is important that the company continues to bag more early stage contracts in order to understand the markets and geologies. It allows them as well to build relationships which should help it scale-up over the long run.Notes: