$2 Natural Gas Could Hit Halliburton’s Exploration Business

April 12th, 2012 by Trefis Team
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Natural gas prices in the U.S. slipped below $2 /MBtu this week, hitting their lowest levels in a decade. [1] Analysts predict that the prices could fall even lower, pushing exploration companies to consider further production cuts. Lower exploration and production activity in North American gas plays could hit oilfield services player Halliburton (NYSE:HAL), which has developed a leading position in the pressure pumping market in the region. Companies have beefed up their capacity in the pressure pumping space over the past few years and, with a possible fall in demand, pricing in the market is coming under pressure. Rivals Schlumberger (NYSE:SLB) and Baker Hughes (NYSE:BHI) have warned of lower profits in North America in Q1 because of changing market dynamics.

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The pressure pumping capacity in the U.S. doubled between 2009 and 2012 to reach 17 million horsepower this year. [2] The rapid rise was a result of low payback periods in the business over the past couple of years, prompting players to add capacity rapidly. High capacity has resulted in lower pricing and falling utilization.

The situation turned worse last winter, as mild weather decreased natural gas utilization and producers ended the season with record underground inventories. Worries that the high production levels in the U.S. could overwhelm storage capacity by October have pushed prices  further downward. Low prices are making gas production unprofitable, forcing players to cut down exploration and production activities.

With prices expected to fall further in the coming months, the number of rigs exploring natural gas will continue to fall. Rival Schlumberger reported last month that it experienced lower pricing in liquids exploration as well because of higher competition. [3] Lower income from pressure pumping services could impact our North American revenues forecast for Halliburton. We will look at the company’s upcoming earnings to analyze the impact of these trends on our price estimate for the company.

We have a $46.09 price estimate for Halliburton, which is at a 45% premium to its current price estimate.

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Notes:
  1. Natural Gas Sinks Beneath $2 Level, WSJ [↩]
  2. Pumping Up Pressure on Chesapeake’s Funding, WSJ [↩]
  3. UPDATE 4-Schlumberger sees hit from fracking price pressures, Reuters [↩]