Halliburton Will Gain As US Poised To Become World’s Largest Oil Producer

According to a recent research report by the International Energy Agency (IEA), the United States is poised to overtake Saudi Arabia as the world’s largest crude oil producer in the the next five years. ^[1] The US is currently the world’s largest crude oil consumer and the third largest producer with production rapidly ramping up as the country taps into unconventional resources like shale oil.

Although the US proven reserves are small compared to those of Saudi Arabia (in 2011 the US had about 21 billion barrels in proven crude oil reserves compared to over 260 billion barrels for Saudi Arabia), the country has been actively leveraging these resources. The US has the  world’s most active drilling operations with over half of the world’s oil and gas rigs located in the country.

Shale Oils And Tight Oils Will Drive Growth

A large part of growth in US crude production is expected to come from shale oil and tight oil, which are varieties of crude oil trapped inside rocks of low porosity and permeability. These oils are of similar or better quality compared to the West Texas Intermediate benchmark and are quite resilient to oil price declines and are viable for production when crude prices are as low as $50 to $60.  ((Will Tight Oil Change The World, Financial Post)) The Bakken Shale in North Dakota and Montana and the Eagle Ford shale in Texas contain some of the largest unconventional oil reserves in North America. Production has been increasing rapidly. For instance, the Bakken shale has seen an increase in output from about 500,000 barrels per day at the end of last year to about 720,000 barrels presently.

Halliburton Will Benefit Through Its Experience With Unconventional Plays

Accessing these unconventional hydrocarbon reserves requires complex operations such as horizontal drilling and hydraulic fracturing, which is a technique of pumping highly pressurized sand, water and other chemicals into the well to stimulate the flow of fluids. These technologies are increasingly becoming a fixture in the American drilling landscape with the current  number of active horizontal drilling rigs standing at over 1,100.

We believe that Halliburton (NYSE:HAL) could benefit from an increase in spending on unconventional E&P activity given the firm’s experience with unconventional plays and its deep entrenchment into the American oil field services market.  The firm’s North American rig services division accounts for about 60% of its Trefis value.

Halliburton provides services for locating, drilling and production and enhancement for wells yielding unconventional hydrocarbons. Given that these plays are more technically demanding compared to conventional plays, it makes it difficult for smaller regional third party firms to compete in this space. As the share of unconventional liquids increases in America’s oil output, it will give scope for Halliburton to improve its revenue base and profit margins.

To bolster its position in this space, Halliburton has been investing in developing its portfolio of services for unconventional wells like greener hydraulic fracturing methods that incorporate  natural fracking fluids and enhanced water treatments technologies.

We have a price estimate of $41 for Halliburton, which is about 34% ahead of the current market price.

Understand how a company’s products impact its stock price on Trefis

1. IEA Press Release [↩]