The Key Trends Driving Halliburton’s $41 Stock Value

Halliburton (NYSE: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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