Digital Solutions To Augment Halliburton’s Earnings In The Long Run

With a steep decline in total active rigs in the U.S. and across the world, Halliburton’s (NYSE: HAL) revenues fell 46% (y-o-y) to $3.2 billion in the second quarter. However, the company reported a positive operating cash flow as the $1 billion of net loss primarily includes depreciation and impairment charges. Interestingly, the company announced a 5-year agreement with Microsoft and Accenture to enhance digital solutions for remote rig operations. The company plans to improve its operating margin by replacing certain direct and maintenance costs with technology-based solutions. Our interactive dashboard on Halliburton’s Valuation highlights the key factors driving the stock price along with the historical trends.

Crude oil prices to remain subdued until inventories ease

• With the decline in global energy consumption, crude oil inventories in the U.S. and OECD countries increased by 9% and 10.5%, respectively, during the second quarter.
• Thus, the worldwide rig count (oil & gas) continuously trended downward due to lower production and cuts in capital expenditure by upstream players.
• As various states in the U.S. re-implement restriction measures, the demand for gasoline and distillate fuel is expected to remain subdued for the full year.
• While the EIA expects global crude oil inventories to ease during the latter half of 2020, WTI and Brent are likely to remain under $40/barrel.
• Therefore, the current low production environment could remain a headwind for oil field service firms until early 2021.

Halliburton’s technology solutions to drive earnings growth

• Consistent with a 50% reduction in global rig count, Halliburton’s Revenues are likely to contract by 35% to $14.5 billion for the full year.
• The company offers drilling and production services to upstream companies including well construction activities and production enhancement products and services.
• Despite a huge blow to the company’s revenues during the second quarter, its two divisions reported a 2-percentage-point reduction in operating margin (ignoring impairment charges) supported by effective cost control measures and structural changes.
• The company is focusing on digital technology solutions to reduce costs and enhance equipment efficiency. The company has partnered with Microsoft and Accenture to deploy a cloud-based digital platform for real-time remote operations and data analytics capabilities to improve operational reliability.
• Historically, Halliburton spent 10% of total revenues on capex and now plans to reduce it to 5%, assisted by the implementation of these new technologies.
• Thus, we estimate Halliburton’s Valuation at $13 per share, supported by a slow recovery in revenues and the ongoing margin expansion initiatives.

As oil producers and service providers face the coronavirus storm, are utility stocks a better bet? Shares of NextEra, Duke, Dominion & Southern are down by 10% compared to steep declines in the oil & gas sector.

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