Halliburton
(
HAL
), the world's second largest oil field service provider, has had a
few rough quarters due to lower drilling activity and a sluggish US
pressure pumping market. However, we believe that the growth
prospects remain strong. The firm's North American operations,
which account for about 60% of the Trefis price
, are poised to gain from a recovery in natural gas
prices, rising US oil production and increasing deepwater
exploration in the Gulf of Mexico. The firm's international
business is also likely to benefit from an increasing focus on
unconventional plays and mature oil fields.
We have a
price estimate of $41 for Halliburton
, which is about 25% ahead of the current market price.
North American Operations
Revival In Natural Gas Prices Will Benefit Pumping
Business
:
Halliburton's performance in the past few quarters was weighed
down by its high exposure to the US pressure pumping market. Low
natural gas prices caused a realignment of pumping capacity from
gas plays to liquid rich plays, leading to an excess of pumping
capacity in the market, resulting in a decline in margins for the
firm's pressure pumping business.
However, a turnaround seems imminent. Over the last few months,
natural gas prices have been on the uptick, rising from under
$2/million BTU in April to current levels of about $3.4/million
BTU. US natural gas demand is expected to rise going forward as
many coal-fired power plants are set to be replaced with natural
gas.
Growing US Oil Production:
According to the Intentional Energy Association, the United States
could become the world's largest oil producer in the next five
years, overtaking Saudi Arabia. A large part of production growth
is expected to come from unconventional resources like shale oils
and tight oils. (See Also: Halliburton Will Gain As US Poised To
Become World's Largest Oil Producer) Extracting oil from these
unconventional resources calls for the use of complex technologies
like horizontal drilling and hydraulic fracturing. Halliburton,
being a leading player in the US unconventional E&P space,
could benefit from the rising US output from shale oil and tight
oils.
Growth In US Gulf Of Mexico:
Higher oil prices are making it feasible for oil firms to explore
in deeper waters. This year, the US Gulf of Mexico witnessed the
highest number of deepwater drilling permits issued since 2007.
Higher offshore and deepwater drilling activity is beneficial to
Halliburton since services to deepwater rigs command better rates
and also provide scope for the firm to offer integrated solutions
to oil and gas companies. However, the region is seeing stricter
regulations following the Macondo oil spill, and this could
adversely impact margins in the short term as the firm adapts to
stricter regulations.
International Business
Global Unconventional Plays:
The international market for unconventional plays like shale gas
has been severely undercapitalized by large oil field services
companies. For instance, Halliburton estimates that countries
outside North America hold more than 80% of the world's shale gas
reserves but under 20% of the pressure pumping capacity that is
required to extract it. Countries like China have recently
conducted auctions for shale gas blocks. Given that most of these
countries don't have the expertise required for developing these
reserves, firms like Halliburton could play an instrumental role in
providing the requisite technology and services.
Growing Presence In Mature Fields:
Mature wells account for over 70% of global oil production.
Halliburton has been investing in expanding its capabilities in
this technologically under-served market. The firm
recently inked a contract with Petronas to help boost production
from mature wells in the Bayan field off the coast of Malaysia.
Production enhancement services are generally quite expensive, but
are likely to be justified with increasing oil prices.
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