Here’s Why We Have Revised Halliburton’s Price Estimate

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Halliburton

The surge in commodity prices that began in December 2016 after the OPEC’s decision to pull back its oil production came to an end in March of this year, as the US oil production and inventories rose sharply backed by the higher oil prices. While the oil cartel has extended the output cuts until March of 2018, the optimism that the deal infused in the global markets last year has somewhat died down. Consequently, oil and gas companies, that saw a strong improvement in the March quarter, are now struggling to sustain this rebound, as the pace of recovery of commodity prices has slowed down.

Halliburton (NYSE:HAL), the world’s second largest oilfield services company, has been on the decline over the last couple of months due to the same reason. The company, that had posted an extraordinary recovery in the last quarter, has witnessed a drop of more than 18% in its share price since the beginning of the year, versus a decline of only 8% in the crude oil prices. This indicates that the growing rig count and drilling demand in the North American markets seen in the first quarter of the year, may not continue to hold in the remaining part of the year. In addition, the weakness in the international and offshore markets could weigh on the company’s performance in the next few quarters. Based on these factors, we have revised Halliburton’s price estimate to $49 per share, which is roughly 9% higher than its current market price.

See Our Complete Analysis For Halliburton Here

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HAL-Q&A-stance-2017

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

Slower-than-expected Recovery In Commodity Prices

As expected, the Organization of Petroleum Exporting Countries (OPEC), at its bi-annual meeting in Vienna last week, decided to extend the production cut of 1.8 million barrels of oil per day (Mbpd) until the first quarter of 2018 to augment the recovery in oil prices. While the market had anticipated the move, the extension did not have a meaningful impact on crude oil prices, unlike the rally in commodity prices witnessed in November 2016 when the OPEC first announced this agreement.

On the contrary, the reduction in the OPEC’s output has instigated the US shale producers to restore their production in order to leverage the bounce back in commodity prices. Consequently, the US oil production has increased from 8.7 Mbpd at the time of the announcement of the deal to 9.3 Mbpd at present. Further, the US oil inventories currently stand at 1,197 million barrels, almost equivalent to the stockpile a year ago. Thus, the rising US output and oil stock have nullified the impact of the OPEC production cuts, forcing the oil prices to hover around the $50 per barrel mark, rather than rising to the $55-$60 per barrel range.

In addition, the US rig count has risen almost 58% to 916 units since November of last year, and is expected to grow further. This implies that the US oil and gas companies will continue to drill and produce more oil in the coming months, which is likely to pull down the oil prices for 2017. Although the expanding drilling demand is good news for oilfield services companies like Halliburton, there is limited upside to this rising demand for rigs, as the oil prices are likely to plunge again if the US oil supply does not cease rising.

Oil-Q&A-OPEC-2

Data Source: US EIA; Baker Hughes Rig Count

Rising Competition In Key Markets

Driven by the sharp rebound in commodity prices, oilfield contractors experienced a sudden rise in the North American drilling demand in the first three months of this year. As a result, Halliburton adopted an aggressive approach to tap the growing drilling demand, and deployed almost twice the amount of pressure pumping equipment than it had originally planned to reactivate through the entire year. Further, the Houston-based company aims to hire over 2,000 oil field workers, especially in West Texas, in order to cope with the recovering drilling demand. While this will lead to a steep rise in the company’s operating costs for the year, its dominance in these markets will provide it an edge over its peers.

That said, the company is facing stiff competition from its counterparts, who are consolidating their operations with other players to enter the much-coveted North American markets. For instance, after Halliburton’s failed attempt to merge with Baker Hughes, the latter decided to merge with GE‘s oil and gas operations, with an aim to provide best-in-class physical and digital technology solutions to the customers in the oil and gas industry. In addition, Schlumberger and Weatherford, formed a joint venture, OneStim, to provide hydraulic fracturing and multistage completions technologies in these markets at relatively lower costs. Although, Halliburton has a lion’s share in the North American markets, and is in a better position to service the rising demand, the growing competition in these markets is likely to be a threat to the company’s position in these markets.

Change In Leadership

Having served Halliburton for almost 17 years, David Lesar retired from the position of Chief Executive Officer (CEO) last month, and Jeffrey Miller, who has been a part of the company since 1997 and held various leadership roles, has been appointed as the new CEO with effect from 1 June 2017. While Miller has a strong track record of leading several successful projects and negotiating great deals with customers, he was not the first choice for the company’s top position. He landed the role after Mark McCollum, Halliburton’s Chief Financial Officer (CFO), left the company to become the CEO of Weatherford International. That said, the company is optimistic about Miller’s appointment and expects him to shoulder the responsibility of lifting the company from the worst-ever commodity downturn. For this, Miller has been trusted with the task of renegotiating contracts with oil producers, convincing them to pay more for the company’s pressure pumping and other services.

Since the beginning of 2017, Halliburton has changed its strategy of defending its market share, and is now focusing on improving its profitability and service pricing in the industry. However, in the first quarter, the company deployed a large amount of its services at low prices to take advantage of the increasing drilling demand. Besides, the recovery in oil prices has eased out and the drilling demand is not likely to rise as rapidly as it did in the first quarter of the year. Even if the demand rebounds sharply, there are other service providers, such as Weatherford and National Oilwell, that could give Halliburton a tough time to negotiate higher prices. Thus, we figure that while Miller might have a strong experience of handling various clients and projects, it might be difficult for him to attract higher prices for the company’s services in the current scheme of things. Nonetheless, a speedy recovery in commodity prices, coupled with Miller’s execution skills, could reverse this situation, and pull Halliburton out of the ongoing slowdown.

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