Halliburton Should Benefit As Permian Activity Picks Up
Halliburton’s (NYSE:HAL) performance in its bread-and-butter U.S. land market has been mixed over the last few quarters, on account of a shortage of pipeline capacity in the Permian basin, which hurt oilfield services activity. Over Q4, revenues from its North American segment declined by 2% year-over-year However, the offtake capacity constraints look set to ease this year with new pipeline capacity coming online, and oil production from the region is expected to surge. Below we take a look at what this could mean for Halliburton and its fracking business.
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The Permian basin is the largest shale field in the U.S, and counts as the most important oil and gas basin for services companies, as CapEx in the region is expected to represent close to a third of total spending on major U.S. land plays within the next three years. Activity in the basin has been relatively lackluster due to a lack of pipeline capacity for the transportation of crude. This has effectively created a glut of oil in the basin, hurting local oil prices and causing operators to slow down their drilling and production activity. However, things are likely to look up over 2019, with new offtake capacity expected to come online. Pipeline capacity in the region is likely to triple from levels of about 3 million barrels per day in 2018 to 9 million barrels per day by late 2021. Much of the capacity will deliver crude to oil refineries in the Gulf coast as well as ports in Texas for exports. The production from the basin is expected to grow from just under 4 million barrels a day currently to close to 5 million per day in early 2020, potentially rising to 8 million barrels per day by 2023, per analysts at Citigroup. Larger operators including Chevron and Exxon have also noted that they would significantly increase capacity in the region. For perspective, U.S. oil production stood at about 12.0 million barrels per day during January 2019, per the U.S. EIA.
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How Halliburton Could Benefit
The higher production plans could translate into stronger demand for oilfield services such as drilling and hydraulic fracturing. Unlike conventional oil wells, shale wells see their production decline fairly rapidly after they begin production, meaning that more wells need to be drilled and fracked to maintain production output. Halliburton, being the largest provider of hydraulic fracturing services, could stand to benefit meaningfully from higher activity in the region. As of early 2018, the company had over 4 million horsepower of fracking capacity, about 65% larger than its nearest rival Schlumberger. The company has also been looking at reducing human intervention, while improving the efficiency of the fracking process, introducing automation software for its pressure pumping operations.
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