Factors That Will Drive Halliburton’s Value In 2017 And Beyond

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After having suffered severely due to depressed commodity prices over the last two years, Halliburton (NYSE:HAL), the US-based oilfield contractor, finally made a comeback in the second half of 2016. The world’s second largest oilfield services company returned to profitability in the third quarter of 2016, owing to the sudden surge in crude oil prices, backed by the anticipation of production cuts by the Organization of Petroleum Exporting Countries (OPEC). In addition, the global rig count also rebounded strongly in the last few months, in line with Halliburton’s expectation. This reinforced investor confidence in the company and its understanding of the industry. As a result, the Houston-based company’s stock price is currently trading almost 50% higher compared to the beginning of 2016. Based on Halliburton’s latest performance and guidance, we have revised our price estimate for the company to $60 per share. Here are the key reasons that support our stance.

HAL-Q&A-2016-stance

Source: Google Finance; US Energy Information Administration (EIA)

Robust Recovery In Global Rig Count

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As mentioned earlier, the agreement among the OPEC members to curtail their oil output by 1.2 million barrels per day (Mbpd) resulted in a sharp rise in the commodity prices over the last six months. In consequence, Brent oil prices, a global benchmark for crude oil, have remained above the $50-per-barrel mark since the deal was announced in November 2016. This, in turn, caused the global rig count (oil and gas) to shoot up to 2,027 units by the end of February 2017, more than 15% higher than the rig count at the same time last year.

Given the optimism in the market about the recovery of commodity prices, we estimate the Brent oil price to average at around $60 per barrel in 2017. Accordingly, we forecast the global rig count to improve notably through the year. Based on the latest Baker Hughes’ rig count data, we have summarized our rig count assumptions in the table below. Further, assuming a gradual rise in the global rig count beyond 2017, we expect Halliburton’s top-line to improve drastically in the remaining years of this decade.

HAL-Q&A-4Q16-5

Halliburton To Focus On Improving Its Pricing

Due to the commodity slump and lower drilling activity in the industry, most of the exploration and production (E&P) companies were focused at extracting maximum value at minimum prices. Consequently, large oilfield service providers like Halliburton experienced difficulty in negotiating and/or renewing contracts with their clients, and had to settle for much lower prices for their services in order to sustain their operations.

However, with commodity prices bouncing back in the last few months, Halliburton now aims to reverse this trend and focus on improving its profitability and returns rather than maintaining its market share by offering pricing concession to its customers. Thus, we expect to see a jump in the oilfield providers’ revenue per rig, and, in turn, its top-line in the coming years.

  

North America To Lead The Rebound In Profitability

Unlike its closest competitor, Schlumberger, the majority of Halliburton’s revenue and profits are driven from its North American operations. Hence, the company was drastically impacted by the commodity downturn that severely hit these markets. However, as the commodity prices began rising in the later half of 2016, the company’s North American operations turned positive in the fourth quarter, reassuring the investors that the worst of the slowdown is over.

Going forward, the oilfield contractor estimated that the drilling and exploration activity in the region is likely to improve in 2017, as it expects large oil and gas producers to reinstate their capital expenditure in anticipation of the increasing commodity prices, augmenting the drilling and exploration activity in the sector. Therefore, Halliburton forecasts its revenue from the region to perform in line with the US rig count, which is already 17% higher compared to that in December 2016. Furthermore, the Texas based company expects to witness an improvement of 40%-45% due to the improving demand for oilfield services and better pricing.

HAL-Q&A-4Q16-6

International Markets And Offshore Drilling To Pick Up In 2018

Contrary to the expected rally in the North American markets, Halliburton foresees the international markets to remain soft through the year due to persistently low activity levels and strong pricing pressure. Consequently, the company will continue to be conservative with its capital spending in 2017, and has set a budget of $1 billion for the full year. That said, the oilfield contractor expects these markets to gradually move in the upward direction through the year, and start recovering strongly in 2018. Thus, even though the weakness in international markets will weigh on the company’s performance in the short term, these markets will play a crucial role in the company’s long term growth and value.

Thus, we anticipate 2017 to be a good year for Halliburton, as the company’s profitability is likely to improve on the back of higher commodity prices and drilling activity in the industry. Further, given the oilfield contractor’s large exposure to the North American markets, we expect the company to outshine its competitor in the coming year.

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