What’s The Outlook Like For Halliburton’s North American Business?

Halliburton’s (NYSE:HAL) North American operations, which account for close to 60% of the company’s revenues, have been faring well, driven by rising oil prices and strong oilfield services activity. During Q1 2018, revenues from the North American segment grew by 46% year-over-year to $3.8 billion, driven primarily by the U.S. land market. In this note, we take a look at what lies ahead for Halliburton’s most important geographic segment.

We have created an interactive dashboard analysis which outlines our expectations of Halliburton over 2018. You can modify the drivers to arrive at your own price estimate for the company.

North American Land Activity

Oil prices have been on the uptrend over the last few months, with Brent crude prices rising to levels of close to $80 per barrel, amid supply cuts by the OPEC and geopolitical tensions with the U.S. deciding to pull out of the Iran nuclear deal. Oilfield services activity in the U.S. land markets has also been trending higher. As of the second week of May, the U.S. rig count was up by about 13% year to date to 1046 rigs, and the number of rigs has also grown by almost 18% since the same time last year. With hydrocarbon prices trending higher, drillers now have a larger portfolio of projects in areas including Oklahoma to North Dakota, where operations such as fracking and horizontal drilling are economically viable once again. Service intensity could also increase with the rising prices, and Halliburton noted during Q1 that its frac fleets were achieving a new record for stage counts, while other activities such as drilling and artificial lift have also seen a strong uptake.

Margins Should See An Uptick

Halliburton has indicated that it expects to achieve normalized margins of roughly 20% in North America by the end of 2018, driven by tighter conditions in the pressure pumping market. While the North American pressure pumping market is expected to add about 3.3 million additional hydraulic horsepower of capacity this year, Halliburton still expects the market to remain tight for the rest of 2018. For instance, the company says that wear and tear and degradation of existing equipment will reduce the effective net addition of capacity. The company estimates that roughly 50% of the announced horsepower would actually be replacing existing equipment. Halliburton has also been looking to address the issue of transportation bottlenecks and escalated labor and material costs. For instance, the company has been looking to clear up some of the bottlenecks related to sand by increasingly using local sand from Texas mines around the Permian Basin, in place of the sand it shipped from Wisconsin.

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