Halliburton (NYSE:HAL) provides products and services to oil & gas exploration and production activity including drilling services and services for existing rigs. Halliburton competes with Schlumberger ( SLB ) and Baker Hughes ( BHI ) in providing these services to oil majors, national oil companies (NOCs) and independent energy firms.
We estimate that Halliburton derives 64% of its value from its North America division. Our price estimate of $57.18 for the company's stock is approximately 20% ahead of its current market price.
Oil & gas exploration in North America has been driven by increasing efforts towards the exploitation of unconventional sources of hydrocarbons such as shale. The Eagle Ford Shale in southern Texas is estimated to hold more than 10 billion barrels of oil in reserves and is one of the upcoming shale plays in the USA.
The high percentage of carbonate shale in this area makes the production of oil more feasible here compared to other shale plays. The UTSA estimates that by 2020, over 5,000 wells may be drilled in this region alone. Drilling permits issued in this region have increased from 91 in 2009 to over 1000 in 2010 and oil production in the region jumped to 3 million barrels in 2010, a 10x increase over the previous year .
Increasing Rig Count in North America
The increase in rig count in the North America is generally taken as a proxy to measure the activity in exploration and production in the geography. The number of active rigs jumped from 1,310 rigs in 2009 to 1,890 in 2010, we estimate this number to grow to 2,140 by the end of 2011 and reach 3,400 wells by the end of the 2017. The expected increase in rig count is largely due to the increase in shale exploration activity in Eagle Ford and other shale plays across the US.
Role of Technological Innovation
Improvement in exploration technology in shale plays has played no small role in the expansion of activity in shale plays. Breakthroughs in horizontal drilling and well fracture technology are enabling economically feasible extraction of shale resources across the region. The increasing use of technology is evident in the increased hydraulic horsepower usage, lateral lengths and the number of stages across the four major shale plays in North America. (( Halliburton Investor Day Presentation , Halliburton)
The use of advanced technology reflects in higher revenues per rig for Halliburton. We estimate the revenue per rig figure for the company to increase by 14% in 2011.