• While Halliburton’s international business is performing well, weakening economic conditions and a potential end to OPEC+ supply cuts are weighing on the stock.
• Stimulus in China and a rebound in natural gas markets are expected to provide a boost, but I tend to think that any impact on Halliburton’s financials will be limited.
• Halliburton’s valuation is now more reasonable, but there could still be significant downside if the global economy continues to slow.
• In particular, if onshore activity in the U.S. continues to decline, Halliburton’s margins will likely come under pressure.

Halliburton’s (NYSE:HAL) share price has been under pressure in recent months, with headwinds in the US offsetting strong performance internationally. Investor expectations have also fallen on the back of soft macro conditions and a likely increase in OPEC production.

The last time I wrote about Halliburton I suggested that downside risks were emerging, in particular, weakening economic conditions and a likely end to OPEC+ supply cuts. I continue to think that while Halliburton may appear reasonably valued, its margins are unlikely to be sustained at current levels.

Market Conditions

Oil demand growth continues to be tepid, which I would argue is unsurprising given the ongoing global economic slowdown. It appears to have come as a shock to many expecting an energy super cycle though, including Halliburton. The International Energy Agency is now forecasting 862,000 bbl/day oil demand growth in 2024 and 998,000 bbl/day in 2025. Halliburton previously suggested that crude oil demand would increase by 1.2-2.3 million bpd in 2024, driven by non-OECD countries.

Monetary and fiscal stimulus in China have been supportive of oil and gas demand expectations but there appears to be little substance to the measures announced so far. Forecasters have cut their projections for Chinese oil-demand growth this year due to a sluggish economy and better than expected adoption of electric vehicles.

A range of economic data suggests that the US economy continues to soften, despite enormous fiscal stimulus. For example, manufacturing data remains weak and pressure on consumer spending continues to mount, even with strong employment. The labor market is weakening though and there is a risk it breaks at some point.

Weak demand is problematic given that supply growth continues to be solid, a situation that could be worsened if OPEC chooses to abandon support for the market. OPEC+ is reportedly considering increasing oil production in December, with Saudi Arabia set to abandon its unofficial 100 USD/bbl oil price target. Production in Libya is also expected to increase after factions in the country reached an agreement to appoint a new central bank governor.

Oil prices have also faced pressure in recent months due to the failure of tensions between Israel and Iran to escalate to a point where oil and gas production and distribution are impacted.

While the oil market remains soft, Halliburton expects activity levels to improve in the US as the integration of recent acquisitions by E&P companies is completed. I’m not sure that activity levels can be materially increased without negatively impacting oil and gas prices though. Service companies are not the only ones showing restraint during the current cycle and I believe that this situation will continue going forward.

Halliburton also expects natural gas prices to recover next year, although it is not clear what the catalyst for this will be. There is a growing narrative that after many years of stagnation, electricity demand in the US could return to solid growth (~20% by 2030), driven in large part by AI. AI data centers alone are expected to add about 323 terawatt hours of electricity demand in the US by 2030 (~9% of total demand) and natural gas is expected to supply 60% of the power demand growth from AI and data centers. Estimates put the increase in natural gas demand between 2.7 and 10 bcf/d, compared to current production of approximately 100 bcf/d.

Unconventional plays could be a growth driver internationally, and while this has been an opportunity many years in the making, E&P activity in Argentina and Saudi Arabia could now finally be reaching maturity. Argentina’s Vaca Muerta continues to scale, supported by an increased knowledge base, the development of local supply chains and a more business friendly government. The Vaca Muerta is currently producing around 250 million scf/day of gas and 400,000 bbl/day of oil. With the right infrastructure in place, it is believed that Vaca Muerta could easily produce 2 million bbl/d though.

The Jafurah field in Saudi Arabia is the largest liquid-rich shale gas play in the Middle East and contains an estimated 200 trillion scf of natural gas. Aramco is eventually targeting sufficient production for domestic energy purposes to displace around 500,000 bbl/d of oil consumption. By 2030, Jafurah is also expected to generate over 420 million scf/d of ethane and around 630,000 bbl/d of NGLs. First gas is expected by 2025 and a sustainable sales gas rate of 2 bcf/d is anticipated by 2030. This will entail an enormous investment, with Aramco expected to spend more than 100 billion USD over Jafurah’s life.

Halliburton Business Updates

A weak demand environment in North America is particularly problematic for Halliburton due to its large exposure to the onshore frac market. This is primarily showing up in the form of declining revenue so far, with service company discipline helping to maintain pricing. Halliburton continues to prioritize returns over market share, and as a result, retired several fleets in the second quarter. The company is also somewhat protected by the fact that close to 40% of its fleets are e-fleets under multi-year contracts. The market is transitioning to e-fleets though, which will undermine Halliburton’s advantage in this area over time. In addition, service companies will likely be forced to pursue market share at some point if demand continues to soften.

While Halliburton is largely at the mercy of market conditions, the company continues to increase its exposure to growth areas through a combination of M&A and internal product development. For example, artificial lift is an area of strength at the moment, with Halliburton’s artificial lift product line growing at double the rate of the rest of the business in international markets. Drilling services is another strong point for Halliburton at the moment, with Halliburton’s drilling services revenue in the Middle East growing 30% YoY.

Halliburton has also introduced a new directional drilling system focused on unconventional reservoirs in North America. The iCruise CX system is designed for challenging curve and lateral applications. It helps to reduce well time through fast drilling, fast tripping time and quicker casing drill outs. It also helps operators to accurately place wells in the reservoir with its precise steering capabilities. Adoption in North America has been rapid, with the number of rigs running the system in the Permian Basin increasing by almost 45% since the start of this year.

Halliburton also continues to invest in its stimulation capabilities, in support of its North America onshore pressure pumping business. For example, the Octiv intelligent fracturing platform is a suite of solutions that enable frac automation, digital operations, and remote connectivity. While this can help to reduce cost and improve service quality, it is difficult to see these types of technologies providing a sustainable competitive advantage.

Financial Analysis

Halliburton generated 5.8 billion USD revenue in the second quarter, which was fairly flat YoY. International revenue increased 8% YoY to 3.4 billion USD, led by Latin America, while North America revenue declined 8% to 2.5 billion USD. The international increase was primarily driven by higher well construction activity and improved wireline activity in Norway, increased completion tool sales and higher stimulation activity in West Africa, higher activity in the Middle East across multiple product lines and higher fluid services in Asia. The decline in North America revenue was driven by reduced pressure pumping services in the US and lower completion tool sales and testing services in the Gulf of Mexico.

In the third quarter, Halliburton expects Completion and Production revenue to decline 1-3% YoY, while Drilling and Evaluation revenue is expected to increase 2-4%. Halliburton’s international business is expected to grow around 10% in 2024, and North America revenue is expected to fall 6-8% YoY in the second half. Halliburton believes that the second half of 2024 will be the low point of activity levels in this cycle, but this seems unlikely given macro weakness and a potential increase in OPEC production.

Halliburton’s margins have stabilized in recent quarters with international gains offsetting headwinds in the US. Halliburton generated 1.1 billion USD cash flow from operations in the second quarter and around 800 million USD of free cash flow. CapEx totaled 347 million USD in Q2 and is expected to amount to 6% of revenue for the full year.

Conclusion

I have been expecting Halliburton’s business to regress for some time now, driven by macro weakness and a normalization of service company margins. While this dynamic has already occurred to some extent, it has been slower and less severe than I anticipated. International markets are currently supporting Halliburton’s business, which could persist if the macro environment remains resilient. There is a risk that increased production from OPEC+ will undermine international activity though.

While there is a persistent belief that natural gas will support a rebound in the US market, I continue to think there is little upside. Natural gas has been a minor contributor to activity levels for over a decade and I don’t see this situation changing.

Halliburton now appears more reasonably valued, but I think a good entry price is probably closer to 20 USD per share. This is because lower activity levels could eventually pressure pricing and margins, leading to a sharp fall in profits and cash flows.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Halliburton Is A Macro Barometer appeared first on Up2info.com.

• Halliburton’s multi-year contract with Petrobras is a significant growth driver, enhancing its Latin American operations amid Petrobras’ aggressive CapEx plans for 2024 and 2025.
• The recent cyberattack on Halliburton, while concerning, is unlikely to materially impact financials or investor sentiment due to its limited disruption.
• Despite challenging North American market conditions, Halliburton’s international segments show strong growth, offsetting regional weaknesses and supporting overall revenue stability.
• Given its beaten-down stock price and attractive valuation, Halliburton is well-positioned to benefit from international growth and potential Fed rate cuts, warranting a cautious “Buy” rating.

Halliburton (NYSE:HAL) is a top oil and gas services firm that supports the operations of energy companies across the globe. The company has been around for over 100 years and has a market cap of just over $25 billion. Its status as a large-cap stable player in the oil and gas services makes it a top holding in the S&P Oil and Gas Services ETF (XES) and a 50-year-long member of the S&P 500 index. However, being in the energy industry makes HAL a relatively volatile stock sensitive to changes in activity in the exploration and production industry which is typically sensitive to energy commodity prices. Thus, it’s important to monitor the fluctuations in market conditions and various events that impact HAL’s operations to develop an idea of where this stock could go. Recently, there have been two headlines involving HAL that are important to address in an investment thesis.

Petrobras Contract

In a press release on August 8th, Halliburton announced that had secured a multi-year contract with Petrobras, set to commence in Q2 2025, for providing comprehensive offshore well intervention and plug and abandonment services in Brazil. The contract encompasses a wide range of services, including fluids, completion equipment, wireline, slickline, flowback services, coiled tubing, and project management services. This agreement covers approximately two-thirds of all interventions and plug and abandonment work for Petrobras, indicating its substantial scope. This contract is likely to have a meaningful impact on Halliburton’s operations in Latin America, where the company reported revenue of $1.1 billion in Q2 2024 or 18.8% of its total quarterly revenue. HAL also benefitted from some minor contracts from LNG-giant Equinor in the Brazilian Raia field where it was awarded a portion of contacts totaling $109 million to be split between Halliburton, Schlumberger, and Baker Hughes.

Petrobras reported at the beginning of the year that it would be increasing capital expenditures (CAPEX) significantly over the next five years with that growth being frontloaded in 2024 and 2025. HAL’s contract is set to begin in 2025 when Petrobras CapEx is set to peak at $17.1 billion which is a great sign for HAL’s potential earnings in this project. However, the tough pricing conditions have caused Petrobras to readjust its 2024 CapEx outlook. So far in the first half of 2024, CapEx is up 12.5% YoY alongside a 3.0% YoY increase in total oil and gas production to 2,737 Mboed. In the same earnings release, Petrobras updated its range of CapEx in 2024 to $13.5 to $14.5 billion which is about $1 billion below the projection from investor day at the beginning of the year and a smaller-than-expected increase over total CapEx of $12.67 billion in 2023. Regardless of the adjustments, there is still a clear intention by Petrobras to increase investment in the next few years which means that HAL’s contract is likely worth a substantial amount and puts it in a good position to grow its business in Latin America further through other deals in the region or more work with Petrobras. It is well known that Petrobras and HAL have strong connections. In 2023. Petrobras recognized Halliburton as its best supplier in the category of “Drilling and Completion Services,” and Petrobras has consulted with Halliburton consistently in digitization efforts. Despite all of this, it is important to keep in mind that market conditions matter and can impact the path of a project as we have seen in the 2024 CapEx downgrade.

Halliburton Cyberattack

Not all news is positive, and in late August, HAL was forced to announce the negative news that it had been affected by a cyberattack on August 21st. Initially, details were scarce, with the company reporting limited information on the day of the attack. Reuters reported that a HAL internal source had said the cyberattack “appears to impact business operations at the company’s north Houston campus, as well as some global connectivity networks.” Approximately two weeks later, Halliburton provided more insight into the incident. The company disclosed that the attack caused disruptions and limited access to business applications, and more concerning, hackers had successfully accessed and removed information from Halliburton’s systems. Despite these serious breaches, Halliburton maintained that the attack “is not reasonably likely to have, a material impact on the company’s financial condition or results of operations.” Nevertheless, the company acknowledged potential future costs and highlighted major risks stemming from the incident, including the possibilities of litigation, changes in customer behavior, and increased regulatory scrutiny.

The limited details surrounding the cyberattack make it difficult to assess the impact that it could have on the stock. HAL’s attack is reminiscent of the 2021 Colonial Pipeline attack which saw hackers successfully execute a ransomware attack for a $4.4 million ransom payment. While the Colonial Pipeline attack likely was more disruptive and generated much more discussion about cyberattacks, it is possible a similar attack on HAL could have resulted in some sort of payment to hackers as well. The most likely costs will come from potential and current customers reevaluating their decisions to choose HAL in the competitive oil and gas services space. Looking at the bigger picture, HAL’s management is probably correct that the cyberattack is not going to have a material impact on future operations. These types of attacks happen a lot more frequently these days (unfortunately), and reports of companies falling victim to breaches are not uncommon and are unlikely to be as market-moving as they used to be. Tech companies like CrowdStrike receive much more scrutiny when technical issues are revealed, so HAL will escape unscathed. Since the initial reports of the cyberattack, HAL is down -7.9%, just slightly worse than the -7.2% decline seen in the broader oil & gas services ETF (XES).

Q2 Earnings

Before both of these events, HAL released its Q2 2024 earnings report on July 19th, 2024. Results were tepid as the company reported earnings of $0.80 per share, in line with the earnings consensus estimate, and revenue of $5.83 billion, a -$120 million miss from the sales consensus estimate and up just 0.6% YoY. Operations were heavily affected by sluggishness in its North American operations where revenue fell -8.0% YoY and -2.6% QoQ due to softer oil and gas activity in the region. Offsetting the weakness in North America was a rise in international revenue of 8.1% YoY and 2.9% QoQ with mid to high single-digit year-over-year increases in all international segment revenues: Latin America up 10.4% YoY, Europe/Africa up 8.5% YoY, and Middle East/Asia up 6.2% YoY. Despite stagnating revenues, HAL saw increases in all bottom line measures, operating income, operating cash flows, and net income, and an increase in capital expenditures.

HAL’s success in maintaining earnings growth through tough North American market conditions has come through the growth in its international segments. North American revenues accounted for 42.5% of total revenue which is the highest single segment, but all international segments outweigh it at 57.5%. The Middle East/Asia segment revenues make up the second largest portion of revenue at 25.7% and are followed by Latin America at 18.8% and Europe/Africa at 13.0%. This geographic revenue split was 46.5% in the North America segment and 53.5% in the international segments just a year ago. International contract awards like the Petrobras contract in Brazil are the reason for the expansion of market share in regions outside of the US and say a lot about HAL’s reputation in the industry.

An overview of oil and gas services firms’ Q2 results from Hart Energy noted that this trend of solid international markets offsetting weakness in the US and Canada was industrywide. An Evercore analyst noted that HAL and its three peers, Schlumberger (SLB), Baker Hughes (BHI), and Weatherford (WFRD), “are well-positioned to benefit from the multi-year global upcycle in E&P spending and the increasing demand for energy services and technology.” Analysts covering these firms agreed with this optimism that HAL and its peers could wait out weakness in the US that was expected to last through the end of 2024 by increasing activity in overseas markets. The positive consensus view has twenty-five of the 28 analysts rating HAL as either a “Buy” or a “Strong Buy” even after tepid Q2 earnings and a -2% negative revenue surprise.

Energy Market Conditions

The worst news for HAL is that energy market conditions are currently moving against them, especially when looking at prices. Oil prices had a dreadful week to start the month of September with the Brent spot price falling -7.2% and the WTI spot price falling -7.5%. These moves are the worst weekly moves since late January and put both spot prices at the lowest levels in almost three years. Natural gas spot prices did not have as bad of a week but they have been trading at decade lows since the start of the year except for a brief spike to $3 in Q2. Weak pricing has put a dampener on E&P activity as measured by a few key indicators.

The most popular indicator of E&P activity, the Baker Hughes rig counts, is the strongest evidence of this trend. Monthly data looking at regional rig counts show that total worldwide counts have been negative for the past 13 months are currently down -3.0% YoY, but that doesn’t even tell the full story. In a broader context, we can see that global rig counts are down significantly from pre-pandemic levels. In 2024, the monthly average so far is 1,743 rigs, well below the 2015-2019 average of 2,069. Most of that change is in a slowdown of activity in North America while the International segment was a bit flatter. More recently, the trend has diverged to a greater degree. Monthly International rig count averages in 2023 and 2024 actually grew year-over-year while in North America they dropped. From these numbers, it is evident that operations outside the US are expanding more than in the US in the tough pricing environment, supporting analysts’ views that oil and gas services firms are more likely to grow in those regions.

Despite rig counts remaining depressed, oil and gas production is expected to increase in 2024 and 2025 according to the EIA. In the US specifically, production growth of 2.3% in 2024 and 3.5% in 2025 is projected to lead to another record high crude oil production of 13.69 million b/d by 2025 which is an additional 756,000 b/d over 2023 production. Other non-OPEC+ crude oil production is expected to increase as well with growth of 3.3% in 2024 and 2.1% in 2025 or an additional 1.47 million b/d over 2023 production. On top of these increases, it is well known that the OPEC+ output cuts are set to expire by December 2024 which will add even more oil to the market through a gradual increase in OPEC+ production through 2025. The energy markets are pricing in this data now and are the primary forces driving spot prices lower alongside rising recession risks through weaker macro data.

Conclusion

Halliburton is currently navigating a complex energy environment with a mix of upside and downside risks. The two recent events are a net positive for HAL as the positivity of Petrobras contract news offsets the negativity of the cyberattack.

1. The Petrobras contract is a significant tailwind to the stock as the size and scope of the contract are likely to be substantial given that Petrobras’ CapEx plans are aggressive in 2024 and 2025. As a side note, Central and South American crude oil and liquid oil fuels production growth (+10.6%) is projected to outpace US crude oil output growth (+5.8%) and non-OPEC+ (ex-US) crude oil output growth (+5.5%) from 2023 to 2025.
2. The cyberattack is a bad look for HAL, but with the frequency of these events, it’s unlikely to do any damage to investor sentiment surrounding the stock. Based on the thin details, disruptions were limited and temporary and are unlikely to impact financials. However, it is early, and more information could come out in the next few months that could change this.

Outside of these events, HAL looks like a solid company fundamentally, but unfortunately, it is sensitive to energy market conditions. If production expansion can occur without a major increase in rig counts, then spot prices can be lower than expected in the medium term and present a risk to oil and gas service activity. However, HAL’s diversified customer base allows it to smooth out volatility in regional activity, and it is well-positioned to benefit from international activity growth while North American activity struggles in the second half of 2024. I am issuing a cautious “Buy” rating for this stock because it has been beaten down in the past year (down -30.1%) and trades at a forward P/E ratio of just 9.0x which is below the sector median of 11.2x. In addition to this, large-cap energy firms that have diversified revenue streams like HAL are likely to weather the storm of low energy prices in the short term and reap the benefits of Fed rate cuts on the horizon.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Halliburton: Large-Cap With Diversified Revenue Stream That Can Weather The Storm appeared first on Up2info.com.

• The past few months have been a bumpy time for Halliburton Company, as the stock materially underperformed the market.
• Despite a recent stock price decline, the company’s financial performance remains strong, with revenue growth and improved operating income.
• Investors should keep an eye on upcoming financial results and industry trends to assess the company’s future performance and potential for growth.

With a market capitalization of $29.76 billion as of this writing, Halliburton Company (NYSE:HAL) is a massive player in the energy services industry. Even though the general environment looks bullish for oil and natural gas at this point, shares of the company are going through a bit of pain. You see, back in April of this year, I wrote an article that took a bullish stance on the firm. I ended up rating the company a ‘buy’ because of a favorable oil environment, robust financial performance, and the fact that shares were attractively priced. Even so, the stock has fallen 12.7% since then, at a time when the S&P 500 is up 13.1%.

As disappointing as this is, I am not deterred. More recent data provided by management does paint something of a mixed picture. In the near term, I think it’s even possible that the company could see a bit of pain from a fundamental perspective. But given how shares are currently priced, both on an absolute basis and relative to similar enterprises, I think that my bullish sentiment was not misplaced. This does not mean that the picture cannot change, either for the better or worse.

I say this because it’s important to remain flexible in our thinking when it comes to investing, especially in the energy market. The good news is that investors will soon have additional clarity as to the health of the company. This is because, before the market opens on July 19th, management is expected to announce financial results covering the second quarter of the company’s 2024 fiscal year. Leading up to that point, analysts were bullish from a revenue and profit perspective. But as with any company at any point, investors would be wise to keep a close eye on things and see to what extent that picture might change.

A look at recent results

When I last wrote about Halliburton earlier this year, we had data covering through to the end of the 2023 fiscal year. Today, results now cover through the first quarter of 2024. That would probably be a good starting point for us to use. During the first quarter of the year, management reported revenue of $5.80 billion. That marks an increase of 2.2% compared to the $5.68 billion generated just one year earlier.

This was driven entirely by the company’s Drilling and Evaluation segment, which provides a wide array of services like field and reservoir modeling, drilling, fluids, evaluation services, well bore placement solutions, and more. During the quarter, the company generated $2.43 billion from this set of operations. That’s 7.2% higher than the $2.27 billion generated the same time one year earlier. Management attributed this increase in revenue to stronger demand for drilling related services in the Middle East and North America, as well as to improved activity in certain parts of its business in Latin America. Higher fluid services revenue in Europe also aided to this top-line growth.

By comparison, the company’s Completion and Production segment was a source of weakness for investors. Revenue of $3.37 billion came in 1.1% lower than the $3.41 billion generated one year earlier. For context, this is the part of the company that provides cementing, stimulation, specialty chemicals, intervention, pressure control, artificial lift, and completion products and services to its customers. Even though the segment benefited from improved completion tool sales in certain parts of the world, as well as higher stimulation activity in Latin America and higher cementing and artificial lift activity in various markets, pain was caused by reduced pressure pumping services in the US.

While revenue increased, profitability for the company took a step back. Net income dipped from $651 million to $606 million. Part of this was because of one-time costs. For instance, the company had some upgrading expenses totaling $34 million. It also saw a worsening of its “other” expenses from $47 million to $108 million. This surge was driven primarily by an $82 million impairment that the company booked on an investment in Argentina, as well as from costs associated with the currency devaluation in Egypt. At least you can say that these are one time pain points for the company rather than something more structural.

If you actually look at the operating income of each of the firm’s segments, you would actually see an improvement year over year. The Drilling and Evaluation segment reported an increase in income from $369 million to $398 million, while the Completion and Production segment saw a rise from $666 million to $688 million. Other profitability metrics were mostly positive. Operating cash flow expanded from $122 million to $487 million. If we adjust for changes in working capital, we do get a decline from $850 million to $828 million. However, this is offset to some extent by the fact that EBITDA for the business expanded from $1.22 billion to $1.25 billion.

Unfortunately, it’s still too early into the 2024 fiscal year to reliably project out what financial performance might look like for the rest of the year. This is especially true, because management has not provided guidance. But if we use historical results from 2022 and 2023, shares look reasonably attractive. In the chart above, you can see how the stock is priced based on these metrics. Using the 2023 figures, shares are especially appealing. And in the table below, I decided to compare Halliburton to five similar firms. On a price to earnings basis, two of the five were cheaper than it. But this number drops to one of the five when we use the other two profitability metrics.

Click to enlarge

What to keep an eye on

Even though I am currently rating Halliburton a “buy,” I do think that some of the uncertainty that investors might have regarding the company is not displaced. Currently, even though energy prices are high, there are some data points that suggest a weakening of demand for the services of companies like this. For instance, in the first quarter of this year, there were 831 drilling rigs in operation in North America. That’s down from the 981 in operation one year earlier. It is true that the number of international rigs is up, having risen from 915 last year to 965 this year. But that doesn’t change the fact that total global rigs are down from 1,896 to 1,796 in the course of a single year.

The fact of the matter is that revenue for the company does typically follow rig activity patterns. In the chart above, you can see revenue for each of the past five years and how that stacked up against the number of global rigs in operation. So far this year, the company is bucking the trend. But this doesn’t mean that things will stay this way for long. The fact of the matter is that we are also seeing some questionable activity when it comes to drilled, completed, and DUC (drilled but uncompleted) wells in the US. Considering that 44% of the company’s revenue comes from North America, this is important to it.

For the first four months of this year, the number of drilled wells totaled 3,446. That’s down 16.3% from the 4,117 wells reported for the same four months of last year. The number of wells completed, meanwhile, has fallen by 14.6% from 4,089 to 3,490. And from April 2023 through April of this year, the number of DUC wells has fallen from 5,323 to 4,510. That’s a year-over-year drop of 15.3%. We have started to see some improvement over the past couple of months. For instance, in March of this year, the number of drilled wells was the highest it had been dating back to August 2023. And for two months in a row, ending in April, we have seen DUC counts rise sequentially. The increase seen in March was the first such improvement experienced since February 2023.

Any sort of drilling and completion activity that is uptrending should be considered positive for the business. That means demand for its services is on the rise. The fact that the industry has seen a general downtrend is indicative of weakness. Of course, a case could also be made that if DUC wells rise by too much, then revenue for the company in the future could be deferred on the Completion and Evaluation side of things. But considering that DUC wells are near 10-year lows, I think that, if anything, this would indicate the potential for the build-up of additional drilled wells.

In the near term, reduced drilling and completion activities could cause some pain for the company. But the good news on this front is that global oil production specifically is expected to continue rising. In the second quarter of this year, according to the EIA (Energy Information Administration), the global supply of oil is expected to be around 102.06 million barrels per day. By the final quarter of this year, it’s expected to grow to 103.11 million barrels per day. And by the final quarter of 2025, it’s expected to hit 105.61 million barrels per day. And for the US on its own, natural gas production is expected to be about 1.6% higher next year than it is forecasted to be this year.

It is with this uncertainty in mind that investors would be wise to pay careful attention to what new data comes out when management reports financial results in the coming days. At present, analysts are pretty bullish. They expect revenue of $5.95 billion. That would be up from the $5.80 billion reported for the second quarter of 2023. They also expect earnings per share to be $0.80. That would be an improvement over the $0.68 per share reported for the second quarter of last year. It is worth noting that the company had an irregular expense of $104 million during that time. So if we adjust for that, earnings per share last year were $0.77. Even this could be a bit odd considering that management has been buying back a great deal of stock. From the first quarter of 2023 to the first quarter of 2022, the firm reduced its share count from 907 million to 891 million. Further reductions are likely and could impact total net income.

If we assume that there is no change in share count, and if analysts are correct, then net income should rise from $610 million last year to $713 million this year. There are no forecasts from analysts regarding other profitability metrics. But likely, these will also increase if analysts are correct about revenue and earnings. In the table above, you can see what these were in the second quarter of 2023.

Takeaway

I understand why investors might be a bit cautious regarding Halliburton right now. But on the whole, the company appears to be very solid. There could be some short-term pain in the not too distant future. And investors would be wise to be on the lookout for indicators of that. However, for now, Halliburton Company shares look attractively priced, both on an absolute basis and relative to similar firms. And absent anything major coming out of the woodwork, I suspect that the bullish assessment that I originally gave the company earlier this year will prove itself out.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Halliburton: Staying Bullish As Earnings Near appeared first on Up2info.com.

• Halliburton’s business continues to tread water, with improvements internationally largely being offset by weakness in North America.
• While Halliburton remains optimistic, some economic data and a reduction in OPEC supply cuts are now pressuring Halliburton’s share price.
• Halliburton’s stock may appear relatively inexpensive, but its margins are unlikely to be maintained at current levels.

While Halliburton’s (NYSE:HAL) North America business has been challenged over the past 12 months, this is currently being offset by increased activity internationally. The company’s profits continue to edge higher, but this hasn’t mattered to the share price, which has been fairly range bound over the past two years.

The last time I wrote about Halliburton, I suggested it was vulnerable due to uncertain macro conditions and its dependence on OPEC supporting oil prices. This is proving to be the case, with soft economic data and a planned reduction in OPEC supply cuts now pressuring the share price.

Market Conditions

Despite growing signs of economic weakness over the past 1–2 years, Halliburton remains constructive on energy demand. The company expects crude oil demand to increase by 1.2-2.3 million bpd in 2024, driven by non-OECD countries.

I tend to think that demand will disappoint going forward as economic conditions continue to weaken. The risk of a recession largely appears to have been forgotten, with equity markets moving higher on the back of strong earnings from a handful of companies. A range of economic data suggests that the US economy continues to soften, though, despite enormous fiscal stimulus. For example, manufacturing data remains weak and pressure on consumer spending continues to mount, despite strong employment. The labor market is weakening though and there is a risk it breaks at some point.

Despite reasonably strong demand growth in recent years, oil supply has been more than able to keep up. The only reason more of a supply glut has not emerged is because of the willingness of OPEC to cut production in order to support prices. This now appears to be coming to an end, though, with voluntary supply cuts totaling 2.2 million bpd being wound down starting in October.

In terms of the services market, Halliburton believes that interest in unconventional reservoirs is rising globally, led by Argentina. Saudi Arabia is also shifting investment from offshore towards unconventionals (Jafurah). Companies like Nabors (NBR) continue to deploy rigs in these regions, pointing towards growth opportunities for Halliburton.

The US frac market should be supported by service company discipline in regard to capacity. This could create a tight market if demand expands, but it won’t save service companies in the event of a downturn. Halliburton also believes that West Africa and the North Sea could be areas of strength in 2025 and beyond.

Halliburton Business Updates

While I am fairly negative about Halliburton’s near-term prospects, this is due to the nature of oilfield services and the deteriorating demand environment. Halliburton has done a good job in recent years strengthening its business, increasing exposure to areas like offshore, artificial lift and production chemicals. This has been supported by small scale M&A to add specific technical capabilities. Halliburton has also invested in differentiating its core services, like hydraulic fracturing.

This includes the company’s ZEUS platform, which offers electrification, automation and subsurface diagnostics. ZEUS reportedly lowers costs and improves the efficiency of operations. Halliburton’s SmartFleet fracture monitoring system is an automated system for real-time subsurface measurement. Understanding fracture growth is becoming increasingly important as core acreage diminishes and parent-child interferences increases. Halliburton’s automation drives efficiency in simul-fracs and optimizes equipment operation for extended life and increased reliability.

Halliburton has also introduced a new directional drilling system focused on unconventionals in North America. The iCruise CX system is designed for challenging curve and lateral applications. It helps to reduce well time through fast drilling, fast tripping time and quicker casing drill outs. It also helps operators to accurately place wells in the reservoir with its precise steering capabilities.

Despite these efforts, Halliburton remains constrained by the fact it operates in fairly commoditized markets that are relatively capital intensive and offer low growth. Services like ZEUS are an advantage at the moment, but operators will become more cost conscious in the event of a downturn. In addition, electric fleets will become the norm over the next few years as service companies upgrade their fleets.

Financial Analysis

Halliburton generated $5.8 billion revenue in the first quarter, an increase of 2.2% YoY. International revenue was up 12% to $3.3 billion and North America revenue was $2.5 billion, down approximately 8% YoY. Growth was driven by Latin America, which generated $1.1 billion, an increase of 21% YoY. Excluding Latin America, Halliburton’s revenue declined around 1%. While Halliburton’s North America business is struggling, it is somewhat insulated from current conditions by the fact that 40% of its equipment is contracted under long-term contracts.

Completion and Production revenue was $3.4 billion in Q1, down slightly YoY due primarily to a reduction in pressure pumping activity. Halliburton’s Drilling and Evaluation division generated $2.4 billion revenue in the first quarter, an increase of 7% YoY, driven by drilling-related services in the Middle East and North America and general strength in Latin America.

Halliburton expects its international revenue to grow in the low double-digits in 2024. International markets are also expected to remain tight, leading to margin expansion. North America onshore activity has reportedly stabilized, and Halliburton expects steady activity levels in 2024. Halliburton expects LNG to eventually drive a recovery in natural gas activity, but this is not expected in 2024.

Halliburton expects its Completion and Production revenue to increase 2-4% sequentially in the second quarter, and Drilling and Evaluation revenue to grow 1-3% sequentially. This would result in approximately 3% YoY revenue growth, a slight reacceleration after four straight quarters of declines.

Halliburton generated $987 million operating income in the first quarter, with a 17% operating profit margin. The Completion and Production division’s operating profit margin was 20%, compared to a 16% margin for the Drilling and Evaluation division. Halliburton expects margins for both divisions to edge higher in the second quarter.

Halliburton generated $205 million of free cash flow in the first quarter. Working capital has been a drag on cash flows, but this is becoming less of an issue as growth moderates. Halliburton’s capital investments are increasing, though, which is offsetting some of the working capital improvements. Free cash flow in 2024 is expected to be at least 10% higher than in 2023.

A recent sharp drop in job openings is suggestive of a further deterioration in demand, which will likely pressure Halliburton’s results in the second half of the year.

Conclusion

While Halliburton appears cheap based on recent earnings, it is actually fairly fully valued when considering the fact its profit margins are probably at unsustainably high levels at the moment. This depends on to what extent service companies are able to demonstrate greater discipline than they have in the past in regard to capacity, and to what extent Halliburton has created real pricing power through service differentiation.

While the company’s earnings are expected to continue increasing, I believe that economic weakness and an expectation of reduced OPEC supply cuts will undermine Halliburton’s profitability as the year progresses. Given the late stage of the current cycle, I believe $20-$25 would represent a more attractive entry point.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Halliburton is one of the largest oil service companies in the world, providing services and equipment for oil and gas exploration and production.
• The company’s largest competitors in the oil services market are SLB Inc. and Baker Hughes.
• Halliburton derives a larger share of its revenues from North America compared to its competitors, giving it more leverage to the production of oil and gas from shale fields in the US and Canada.
• Long-term evolution in the shale business and industry M&A benefits Halliburton, but the company faces shorter-term headwinds.
• I’m rating the stock a Hold for now but believe it could see upside to the high $40s into early 2025.

When I start analyzing a company, I always ask myself a series of questions.

Two of the most important are:

Which companies are in the peer group?

What makes this company different or unique from its peers?

It’s useful to understand a company’s peers for several reasons including to assess how the market values companies in a particular industry and what are considered normal earnings or cash flow multiples. In addition, it’s often possible to track trends across multiple companies in the same, or related, industry groups providing useful information for assessing relative growth prospects.

The second question is crucial to understanding the relative performance of different stocks in the same industry group.

Halliburton Company (NYSE:HAL) is one of the largest diversified oil service companies in the world. HAL is not a producer – the company doesn’t produce and sell oil or gas – rather, it provides crucial services and equipment needed to explore for and produce hydrocarbons.

Put in a different way, when a company like Exxon Mobil Corporation (XOM) or EOG Resources, Inc. (EOG) spends money – capital spending (CAPEX) – on drilling new wells or developing new oil and gas projects, much of that spending represents revenues for the oil services companies.

In HAL’s case, its largest peers – competitors in the oil services market – are Schlumberger Limited (SLB), the company formerly known as Schlumberger, and Baker Hughes Company (BKR). The biggest differentiating factor between HAL and its two largest competitors is that HAL derives a much larger share of its revenues from North America.

Per Bloomberg, HAL derived 45.6% of its 2023 revenues in North America compared to around 20% for SLB and 26% for BKR. That’s crucial in the oil services business because it means HAL has far more leverage in the production of oil and gas from shale fields in the US and Canada than its large-cap peers. Indeed, within North America, HAL’s main competitors are much smaller firms such as ProFrac Holding Corp. (ACDC).

In this article, I’ll explain why the shale business is in the midst of a historic transformation that’s related to the recent wave of mergers & acquisitions (M&A) activity we’ve seen among producers in the region. I’ll also outline why I believe HAL has a significant competitive advantage over smaller oil service rivals in the region and how that could ultimately drive the stock higher towards my 12-month price target in the upper $40s, a more than 20% premium to the current quote.

Finally, while HAL has significant long-term advantages, I’m rating the stock a “Hold” for now because it faces two near-term headwinds that look likely to limit appreciation potential through the middle of this year.

Let’s start with this:

Shale: From Growth to Profitability

It’s useful to divide the global oil services industry into two pieces by geography: North America and International.

The former is dominated by shale drilling and completion activity:

According to the Energy Information Administration (EIA) Drilling Productivity Report, oil production from the Permian Basin alone was roughly 5.98 million bbl/day in January 2024, around 48% of total US oil production. That’s up from just over 18% of oil production in January 2015, less than a decade ago.

And, if we sum up expected oil output in April 2024 from the three largest oil-producing shale regions of the US – the Permian of Texas and New Mexico, the Bakken of North Dakota, and the Eagle Ford in south Texas — the total comes to around 8.6 million bbl/day, a commanding two-thirds share of total US oil output.

A decade ago, in April 2014 the EIA estimated the same three shale regions produced just under 3.9 million bbl/day, around 46% of total US oil output at that time.

Shale is more like a manufacturing business, or an industrial process, than conventional oil and gas exploration and development. That’s because producing more oil or gas from shale is largely a matter of ramping up drilling and completion activity. The term drilling is self-explanatory; for shale producers, completion refers to fracturing a well and putting it into production.

So, from the dawn of the shale boom in the late 2000s up until roughly 2020, shale producers generally chased commodity prices:

Fracturing, often called “pressure pumping” in the industry, is the magic sauce for producing shale.

Oil doesn’t exist naturally underground in some sort of giant lake, nor is natural gas found in an underground cavern. Instead, the hydrocarbons are found trapped in the pores, natural cracks, and fissures of underground rock formations. In a conventional reservoir, those pores and cracks are well-connected (the field has good permeability), so oil and gas can flow naturally into the well powered by geologic pressures.

In shale, however, that’s not the case. So, producers must provide that permeability artificially by pumping fluid (mainly a water-sand mix) into a well under tremendous pressure to physically break up the rock, creating artificial fractures/cracks through the shale. That’s known as hydraulic fracturing.

The sand, known as proppant, is designed to flow into those fractures to keep them open as the pressure is reduced following the fracturing process.

A shale well can’t be produced economically without fracturing. While there are hydrocarbons trapped in the shale, there’s no way for them to flow through the reservoir rock naturally into the well in economic quantities.

A frac spread is simply a collection of pump trucks, crews, and related equipment needed to perform the hydraulic fracturing process.

My chart above shows the total US frac spread count from Bloomberg since early 2014 (blue line) as well as the closing price of front-month West Texas Intermediate (WTIC) oil futures (orange line).

The correlation between these two series prior to roughly 2020-21 is clear. For example, at the beginning of my chart, through the first nine months of 2014, oil prices were elevated at around $100/bbl and so was fracturing activity with over 400 active frac spreads at times that year. Simply put, with oil around $100/bbl, US shale producers were actively drilling and completing wells to bring more production online and take advantage of high commodity prices.

Oil prices then began a long slide from late 2014 through early 2016; producers responded by slashing their drilling and fracturing activity and the frac count collapsed to under 150 active spreads by early 2016.

Then, from 2016 through much of 2018, oil prices rallied, and the pattern repeated — US shale producers responded by drilling and fracturing more wells with the frac spread count jumping over 500 in 2018.

In short, through the 2014-18 period, the US shale industry was a story of booms and busts mirroring swings in commodity prices.

What’s crucial is this pattern started to change in 2020-21. While the fracturing spread count did recover as WTI rallied from its spring 2020 COVID-19 lockdown lows, the frac spread count hit a wall in the 250 to 300 ranges by late 2021. Even as oil prices soared in 2022 to well over $100/bbl, US shale producers roughly maintained their activity levels on this basis.

Indeed, the average weekly price of oil since the end of 2022 is about $78/bbl, a comfortable level for most oil-focused shale producers, however, the US frac spread count has drifted slightly lower over this time, a trend visible on my chart.

As the shale industry matures, producers have become far more disciplined.

Here on Seeking Alpha, I’ve covered a long list of shale oil and natural gas producers in recent months including, most recently, Matador Resources Company (MTDR) in “Profitable Oil Growth, Raising Target,” EOG Resources in “Organic Growth at a Discount” and Devon Energy Corporation (DVN) in “Turnaround Underway, Time to Buy.”

While these producers operate in different shale basins and have various commodity production mixes, they all share one common overarching strategy – most shale producers are focused on generating positive free cash flow even with moderate crude oil prices. Most are also promising to return significant capital to shareholders as dividends, via share buybacks, or through paying down debt (transferring value from creditors to shareholders).

Over the past three months, the majority of producers I cover have issued guidance for 2024 production and, in most cases, I’ve covered here on Seeking Alpha, US shale producers are spending just enough to roughly maintain their production through 2024 adjusted for any recent acquisitions.

Long story short, we’re not seeing a dramatic surge in drilling and completion activity this year despite generally rising oil prices because producers aren’t targeting barrels of production, they’re targeting profitability and cash flow.

Pressure Pumping and Halliburton

HAL is one of the largest providers of fracturing services in North America through its Completion and Production business segment, which accounted for some 59% of revenues last year.

So, as you might expect, the historic volatility and commodity sensitivity of the shale business I just outlined translates into significant volatility in HAL’s North American operations:

This chart shows Halliburton’s revenues by quarter since Q1 2014 broken down into North American sales (blue line) and international revenues (excluding North America) pictured as an orange line.

Two points to note.

First, the amplitude of swings in HAL’s North American revenues is significantly greater than for its international revenues. That’s a direct result of the boom-and-bust pattern evident in shale oil and gas drilling and fracturing activity I just outlined.

For example, just look at the shale bust of late 2014 to early 2016 when HAL’s North American revenues collapsed from around $4.75 billion per quarter to about $1.5 billion per quarter over the course of just around 18 months. Then, there was a boom from 2016 through mid-to-late 2018 followed by an even bigger bust into the commodity price collapse of early 2020 amid COVID-19 lockdowns.

Of course, when commodity prices fall sharply, as they did in 2014-16 and 2018-2020, exploration and drilling activity tends to fall globally. However, international revenues are historically far more stable for HAL than North America.

That’s primarily because conventional oil and gas developments outside North America often take the form of long-term projects targeting fields that take years to find, develop, and bring into production.

A classic example would be Exxon Mobil’s world-class find in Guyana; XOM announced its first discovery there in May 2015 and has subsequently unveiled more than 30 additional discoveries on the same offshore Stabroek Block. The company produced its first commercial oil from Guyana in late 2019 and has continued to develop the project in stages; as of Q4 2023, the company was producing 440,000 barrels of oil equivalent per day from the country and is targeting over one million by the end of 2027.

Simply put, Exxon Mobil is unlikely to dramatically alter its plans for developing the Stabroek Block due to short-term fluctuations in commodity prices. And the company typically signs long-term contracts with multiple services firms like HAL and SLB, to perform work related to developing a project like the Stabroek Block. That leads to more stable, predictable revenues over time.

The second point to note is HAL’s North American revenues have been coming down since early last year while its international sales have continued to trend higher, growing about 11.6% year-over-year in Q4 2023 compared to a 7.2% decline in North America revenues year-over-year.

Naturally, the obvious fear here is that HAL’s North American business could be entering another one of those dreaded bust cycles when a decline in shale drilling and fracturing activity leads to a slump in revenues and profits.

Fears of a big downturn in North America also explains, at least in part, why Halliburton underperformed SLB, its closest diversified oil services peer, from April 2022 through the summer of 2023:

Take a look:

To create this chart, I calculated the cumulative total return from both HAL and SLB since the end of 2021. The line shows HAL’s cumulative total return less SLB’s total return on a dividends-reinvested basis; when this line is rising, HAL is outperforming and vice versa.

When commodity prices soared in early 2022, HAL initially outperformed, likely on the view that shale drilling and production activity would accelerate to offset supply disruptions caused by the Ukraine-Russia conflict. However, that outperformance reversed in dramatic fashion from roughly mid-April 2022 through the summer and early autumn of 2023.

If you scroll back and look at my chart of the US fracturing spread count, you’ll see it peaked in late 2022 and, in my chart of HAL’s revenues, you can see North American revenues peaked in Q1 2023. Over the same time, international revenues continued a clear pattern of growth; in fact, HAL’s international revenues have reached the highest quarterly levels since late 2014, the top of the last big upcycle, over the past two quarters.

Given SLB’s greater exposure to international oilfield spending and HAL’s significant leverage to the more volatile North American business, it’s clear investors showed a preference for SLB from April 2022 through last summer.

That trend has since reversed – something I’ll explain in just a moment – however, the key point to note is that HAL’s stock tends to see significant leverage to expectations for North American fracturing activity. And North American revenues and activity levels have a reputation for commodity sensitivity and volatility grounded in the experience of the shale boom and bust years.

In my view, many investors underappreciate two major changes in North America – one industry-wide and the second specific to HAL – that are changing this pattern of boom and bust.

Let’s start with this:

Changing Customers

Historically, there are three major categories of customers for oil services firms outside the US – the large integrated “supermajors,” national oil companies (NOCs), and a handful of large independents.

As I mentioned earlier, international oil and gas projects tend to be large-scale, multi-year developments targeting major conventional (not shale) reservoirs. Developing these projects requires billions in up-front capital investment often years before the first drop of commercial oil. As I mentioned earlier, XOM announced its first Guyana discovery in May 2015 and didn’t produce commercial oil and gas for sale – or start generating significant revenues – until almost five years later in December 2019.

My point is the big supermajor integrated producers like XOM have historically been the only companies large enough, with enough technical expertise, and with a low cost of capital low enough, to develop a project like Guyana. It’s a matter of scale – this year XOM has a CAPEX budget of $23 to $25 billion, which is almost as much as the entire market capitalization of Devon Energy at $33 billion with the latter considered a large-cap shale producer.

NOCs are typically fully or partly owned by the local government and have varying degrees of technical expertise and financial strength. For example, Saudi Aramco, majority-owned by the Kingdom of Saudi Arabia, is a technically sophisticated NOC that routinely works with oil services companies like SLB and HAL. Others, like Algeria’s NOC, Sonatrach, tend to partner with US and European oil majors on new projects; these NOC-integrated joint ventures also contract with major services firms on projects.

There are also a handful of large US independents with significant international projects including Occidental Petroleum and EOG Resources. Since international projects tend to be large-scale in nature, they’re typically operated only by the largest independents.

Generally, international spending on oil and gas development is longer-term and strategic in nature; companies tend to make investment decisions based on a low long-term breakeven cost. In the case of XOM, the company has indicated that 90% of its developments worldwide, including Guyana, can generate a greater than 10% annual return on investment even with Brent Crude Oil at $35/bbl compared to a closing price of $87.29/bbl on Friday, April 19 per Bloomberg.

The shale industry is different.

As I illustrated earlier, shale producers have tended to be more responsive to commodity prices over time, accelerating activity when oil and gas prices rise and cutting CAPEX and activity when prices fall.

One reason is it takes far less time for a group of shale wells to be drilled and put into production than a vast international project – weeks rather than years – and upfront costs are much lower. For much of the industry’s history, shale production has been dominated by smaller independent exploration and production firms (E&Ps) and private operators.

That’s changing, and the shale industry is increasingly dominated by the same firms, and types of producers, as international oil and gas spending.

Some of that shift is due to the wave of merger and acquisition (M&A) activity underway.

I’ve already spilled some ink on XOM’s big international project in Guyana in this article. However, the company is also a massive producer in the Permian Basin in the US — last October, for example, XOM agreed to buy Permian producer Pioneer Natural Resources Company (PXD) in an all-stock deal worth close to $65 billion including assumed debt.

At the time the deal was announced, XOM controlled some 570,000 net acres in the Permian and Pioneer controlled more than 850,000 acres. Combined this massive position produces more than 1.3 million barrels of oil equivalent per day and Exxon has targeted growth to 2 million boe/day by the end of 2027 pending closing its deal to buy PXD.

And, in December, large independent E&P Occidental Resources agreed to acquire privately held CrownRock in a $12 billion deal adding some 170,000 boe/day of production to OXY’s existing position. OXY now expects to produce 569,000 to 599,000 BOE/day from its Permian position alone including CrownRock.

Another large Permian independent, Diamondback Energy, Inc. (FANG), announced a deal to acquire privately held Endeavor Energy Resources for $26 billion in February of this year, boosting its position in the Permian to 838,000 net acres and 816,000 boe/day of production. The company believes it has 6,100 drilling locations – years of inventory – that’s profitable at prices below $40/bbl WTI.

As these integrated producers and large independents scale up their US shale businesses and the industry consolidates, the strategy has started to morph into one that closely resembles the traditional international project model.

In XOM’s case, the company has three main strategic growth areas outlined in its latest Corporate Strategic Plan – Guyana, Permian, and Liquefied Natural Gas (LNG). The company’s Permian Basin assets compete with other projects in its portfolio; just as with conventional international projects like Guyana, the company’s plan is to ramp up Permian output to a sustainable plateau (2 million boe/day with Pioneer by 2027) and to generate free cash flow from the asset at prices around $35 per barrel or higher.

For the oil services providers that operate in North American shale, there’s good news and bad news.

On the positive side, the focus on low breakeven costs and steady, large-scale development should help alleviate the boom-and-bust cycles that have plagued the shale industry from its infancy two decades ago. You can already see that to an extent in the charts of fracturing spreads I outlined earlier – the industry hasn’t shifted activity as dramatically to swings in commodity prices since 2021 as they did back in the 2014-2020 era.

On the negative side, these large-scale shale producers are far more efficient than the traditional smaller and private operators – they can produce more oil and gas with fewer drilling rigs and using less fracturing capacity.

Take a look:

This chart shows the total oil produced from new wells per drilling rig in the Permian Basin region since 2007. As EIA acknowledges in the notes to the report this productivity metric can become unstable during periods when the number of rigs operating in the play rises or falls dramatically (such as the spring 2020 commodity collapse). However, the long-term trend here is clear – Permian producers are producing more oil with fewer active rigs.

Greater efficiency and productivity is good news for the producers – it means more oil and lower costs per barrel – however, think about it in terms of the oil services firms like HAL. If producers don’t need as many rigs or fracturing spreads to grow their oil or natural gas production, that means less work for the services firms.

Simply put, while the “busts” aren’t likely to be as dramatic as the industry experienced in the 2014-2020 era, the industry is capable of growing production without as much raw fracturing capacity or as many rigs, so there’s less work for the North American service providers, and drilling contractors, in aggregate.

Put in a different way, some of the value of the US energy industry has shifted from the services firms to the producers as a result of these efficiency gains.

I believe this plays right into the hands of larger players like HAL, which brings me to this:

ZEUS and e-Frac

The simple fact is that a large integrated oil company like XOM demands a high standard of operating efficiency from the service companies it works with and will likely favor large, well-capitalized providers like HAL over smaller operators. It also likely helps XOM have experience with HAL providing key services for its international projects.

Much the same can be said of a large independent producer like Diamondback Energy.

These large-scale shale producers are likely to prioritize quality of service, efficiency, and equipment up-time over raw costs when it comes to executing on steady, multi-year shale drilling plans.

HAL is increasingly differentiating its North American services business through the introduction of its ZEUS electric fracturing (e-frac) completion solution. Historically, fracturing spreads have largely been powered by diesel, which is expensive. Moreover, while diesel engines are a time-tested, reliable technology, the high-capacity engines that power fracturing pumps do wear out over time and require significant maintenance to operate at peak efficiency.

In the summer of 2021, Halliburton announced deployment of the ZEUS system as part of a multi-year contract with Chesapeake Energy Corporation (CHK) in the Marcellus Shale region of Appalachia. In that project power is generated on-site by partner, VoltaGrid, which has generators capable of using natural gas, LNG, and a variety of other fuels. In this case, Chesapeake can use field natural gas produced locally from its existing operations.

Halliburton has deployed a similar system for FANG in the Permian, using power generated from a central power generation facility built by VoltaGrid. Back on FANG’s Q4 2022 call in early 2023, this exchange during the Q&A portion of the call highlighted some positive efficiency gains from the ZEUS system:

Analyst Question: Yes, good morning. I want to circle back on the completion efficiency comments, e-frac — e-frac obviously brings a pretty good fuel savings given that the gas diesel spread here and obviously associate the ESG benefits. But do you think e-frac additions will be additive to the improvement in cycle times above and beyond what you’re seeing from simul-frac?

FANG CEO Travis Stice: Yeah, I think generally Scott, they complete a similar amount of lateral feet as the simul-frac crews, as we’re seeing early time. But on top of that e-fleets, on a fuel efficiency basis, not just the type of fuel but the efficiency of the fuel used is — has been a positive surprise.

I think the last thing I would add is that it does, it does operate on a much smaller footprint. So, maybe your moves are smaller, but you do have some electrical infrastructure associated with those, those fleets. Dan, do you want to add anything to that?

FANG COO Daniel Wesson: Yeah, I think we’ve only been running the first crew for about six months and we’ve been really impressed with the performance thus far. It has outperformed our other fleets kind of on the margin, but not too measurable. We do believe that over time, you’ll see that gap widen in performance just really believe that the maintenance required around the e-fleet equipment will be substantially less. So, we’re excited to learn through that with Halliburton and recognize some added efficiencies in proper just fuel savings as we go forward.

Source: Diamondback Energy Q4 2022 Earnings Call

This quote is from a little over a year ago, the early days of the FANG deal with Halliburton. However, the company was already highlighting both substantial fuel savings from using electricity generated using FANG’s field natural gas as well as lower maintenance costs and downtime for the e-frac equipment relative to diesel fracturing spreads.

From Halliburton’s perspective, however, the most important point of all is that producers like Chesapeake and Diamondback are willing to sign long-term contracts to cover its ZEUS fracturing services.

During HAL’s Q4 2023 earnings call three months ago in late January, the company announced that 40% of their entire fracturing fleet in 2024 represents ZEUS e-frac fleets and that “well over half” will be electric in 2025. As the company builds and deploys new e-frac fleets, it’s retiring older diesel-powered spreads. HAL also noted these e-fleets are “on multiyear contracts, generating a full return of and return on capital during their initial contract terms.”

A little later in the same call, HAL’s CEO described the process of contracting the ZEUS e-frac fleet as a negotiation between the producer and HAL focused on long-term value to be extracted from the system.

Here’s what HAL CEO Jeff Miller had to say during the Q4 Call in response to an analyst question:

Look, e-fleets are accretive. They’re accretive for a couple of reasons. Number one, highly efficient to operate from our standpoint. And so that makes them more accretive. Clearly, they are bringing a lot of value to clients, and therefore they’re priced and thought about differently in the marketplace. And so, look, I expect that, that will continue into the future.

But I think what’s most important is the contracted nature of the fleets, which means a couple of things also. Number one, that the pricing is sticky, but it’s sticky because it’s contracted over time and the value is thought about. And so, sophisticated procurers can look at that and model that and we can model it as well and be comfortable with the value created.

But I think the second thing as we think about what types of customers look at e-fleets, these are not — these aren’t a spot market solution. I mean, the companies that are interested in e-fleets are those that have steady programs, work through cycles, have a clear vision of where their business needs to go and are willing to commit to the technology to deliver that over the long term. And so — and really, it’s an entire system.

Source: HAL Q4 2023 Earnings Call Transcript

Two main points to note.

First, historically contracting for fracturing work has been based on short-term contracts or the “spot” market – a producer contracts for a certain number of wells to be completed at a certain time, paying a market rate based on the supply and demand for spreads. So, it was largely a commoditized market.

The e-frac solution is different – HAL isn’t competing with older diesel fleets in the spot market, it’s negotiating multi-year deals with producers at fixed prices, and it doesn’t build new ZEUS fleets until they’re backed by long-term contracts.

Second, note HAL’s comments about the customer base, along the lines I outlined earlier. The companies that are willing to contract with HAL to use ZEUS are large producers with a steady development program in a shale field like the Permian, not operators who will dramatically shift their CAPEX plan based on near-term commodity price trends.

Bottom line: The shale business is changing, evolving, and consolidating and HAL looks well-placed to benefit thanks to its differentiated technologies like ZEUS that appeal to larger, more efficient shale producers. Over time, I’d expect this to translate into more consistent revenues and profit margins for HAL in North America compared to the volatile shale boom and bust era prior to 2021.

Shale Short-Termism

After years of short, high-amplitude shale cycles, investors are (understandably) wary of the North American oil services cycle and the potential for the recent slide in drilling and completion activity to provoke a swoon in HAL’s business.

There are some clear signs of a big, positive shift in the North American cycle in the HAL’s business. A little earlier on in this article, I posted a chart of HAL’s North American revenues, which have only seen a modest slide despite the retrenchment in drilling and completion activity since 2022.

You can also see it in HAL’s profit margins:

Despite substantial volatility in shale drilling activity since late 2020, HAL’s overall profit margins on an EBITDA basis have steadily improved over this time.

Regardless, the market remains worried about the profitability, and the potential for a downturn, in HAL’s North American operations. Investors are easily spooked by any evidence that pricing power is fading in North America due to lower activity.

Consider these comments from the Q4 2023 conference call of a fracturing competitor in North America, ProFrac:

Analyst Question: Good morning, gentlemen. I wanted to see if you could give us a sense of the tuck-in pricing concessions. Did you yield, call it, relative to the leading edge in order to improve utilization from the beginning of the fourth quarter?

And thoughts on could this — what has been maybe the reaction to — from your peers, from some of your market share gains? Do you worry that this could have maybe a destabilizing impact on the level of pricing discipline that we did observe in the industry last year.

ProFrac Chairman Matthew Wilks:

Good morning, Arun. I really don’t care what it does to our competitors. I don’t spend a lot of time thinking about them. We’re doing what’s right for ProFrac. We’re taking market share. We’re not going to hold up pricing to their benefit and feed market share to do it. We’re taking our market share back and don’t really care what it does to them. What I like is what it does for us.

Source: ProFrac Q4 2023 Earnings Results and Conference Call March 13, 2024

Simply put, in 2023 overall drilling and completions activity in US shale fell as I outlined earlier. However, most competitors in the business remained disciplined on price; in ACDC’s case, management believes they were too aggressive in maintaining prices in 2023, ceding market share to key competitors.

So, as you can see referenced in the above quote, the company has decided to get more aggressive on pricing concessions this year in an effort to regain market share and improve the utilization of its frac fleet. Utilization, a measure of activity relative to fleet capacity, is important because idle days for fracturing equipment spell less revenue and, potentially, higher costs to maintain or reactivate idle equipment.

An analyst asked ACDC if they thought lowering prices would lead to a sort of “price war” with its competitors, a list that would include HAL, as its peers seek to maintain their own market share by also offering concessions.

Chairman Matt Wilks responded by saying he doesn’t care what this strategy does to competitors and that ACDC is intent on taking market share.

That’s clearly not the sort of comment that instills confidence in the profitability of the shale services business – the read-through for HAL is that there’s a risk they might have to cut pricing for North American services to maintain market share, leading to another “bust” cycle.

As I’ve outlined, my view is that these fears are overblown – HAL clearly offers a differentiated, higher-tech product in ZEUS than ACDC, a company that still contracts significant equipment on the spot market or under short-term contracts. In a sense, it’s two very different markets, and HAL’s position insulates it from any pricing concessions on lower-end equipment.

Regardless, it’s likely this risk will act as a substantial headwind for HAL’s shares over the next 2-3 quarters until there’s further evidence of stabilization or an upturn in the North America cycle.

One of the reasons I listen to or read transcripts, of conference calls from the likes of HAL and SLB every quarter is that management teams at these firms offer substantial big picture “macro” commentary about the industry. Generally, SLB has an unparalleled understanding of the international market while HAL rules in North America.

Here’s what HAL had to say about the US market during its Q4 2023 Call:

Analyst Question: Yes, good morning, Jeff, team. Appreciate the time. The first question is around — more macro question, which is one of the things that surprised us last year was the exit to — exit of U.S. oil production, which came in above I think where consensus expectations were. You have unique visibility into the U.S. completion and volumes. What do you think happened there? And as we think about 2024, how do you think about the exit rate of U.S. growth? Maybe talk about the moving pieces including DUCs?

HAL CEO Jeff Miller: Yes. Look, if I’m thinking about production growth in ’24 production is a function of service intensity. So simply put, more sand, more barrels, and we saw peak levels of service intensity throughout last — really in the first half of last year, and a lot of that comes on in the latter half. And I think some of this is efficiency in the sense that we are delivering more sand to the reservoir. And that comes in a lot of forms. The e-fleets are part of that, and some of the technology that we’ve brought to market.

But I also think that the market that we see for next year, it’s hard for me to forecast at this point exactly what operators will do because every operator plays their own game. But at the same time, I would probably take the over on rigs because I think that, we’ll run out of DUCs at some point. I think I would take the under on production only because whatever you think it is, I’ll take the under only because what we see are stable customers delivering their plans, but what we don’t see is a lot of the smaller companies coming into the market to really amp up production.

So I think, from our perspective at Halliburton, very stable market. But from a production standpoint, as we watch it unfold, it’ll be a matter of how much incremental sand gets pumped to overcome what is clearly going to be a decline rate that comes with, when we add barrels rapidly, obviously, they fall off rapidly.

Source: HAL Q3 2023 Earnings Conference Call Transcript

HAL’s CEO describes the evolution of the US shale business in 2023. At the beginning of the year, there was a surge in drilling and completion activity primarily driven by smaller operators – including many private companies – that were looking to grow production and, in many cases to dress up their businesses for sale. And, as I noted earlier, there was substantial M&A, particularly in the Permian, and targeting private operators in 2023.

When you boost drilling and completion activity, it takes a quarter or two for that to “show up” in results in the form of a surge in production; therefore, as Mr. Miller explains there was a surge in US oil production in the second half of last year and production was above expectations at year-end.

However, there’s a hangover from this.

As HAL indicated, activity slowed in the second half of last year, and, in early 2024 at least, HAL did not see the smaller producers accelerating activity to increase production.

Shale wells have high decline rates, meaning that production usually commences at a high initial rate but slows dramatically in the first 12 to 24 months after a new well is drilled. So shale producers are on a treadmill — a producer must drill some wells just to offset declining production from older wells, what’s known as the base decline rate.

So, heading into next year, HAL’s CEO is taking “the under” on production as the base decline rate eats through the surge in late 2023. HAL’s view is that some late 2023 surge in production will fade as 2024 progresses due to the drop in drilling and completions activity since the middle of last year.

He’s taking “the over” on rigs as producers seek to stabilize production declines heading into 2025.

In addition, the term “DUC” is an acronym for Drilled Uncompleted wells – these are wells that have been drilled but have yet to be fractured and put into production. Producers tend to build their inventory of DUCs when commodity prices are low; rather than put wells into production immediately, the company waits for a more favorable pricing environment.

HAL’s CEO believes the industry is running low on DUCs, meaning that producers will need to put more rigs to work and boost activity levels to increase production by 2025.

The EIA’s Drilling Productivity Report contains estimates of the total number of DUCs in various shale fields. The EIA’s data is broadly consistent with HAL’s comments – in the Permian, for example, EIA estimated 886 DUCs in March of this year compared to 2,560 DUCs three years ago in March 2021 and more than 1,350 two years ago in March 2022.

Bottom line: The main driver of my “Hold” rating on HAL stock right now is that there remain significant short-term concerns about service activity in North America through 2024. That’s likely to remain a headwind until there’s clear evidence the cycle is turning.

International: In Brief

As I noted in the intro to this article, the main differentiating factor for HAL relative to a peer like SLB is its exposure to North America and, in particular, shale drilling and completion activity in the region.

In my experience, it’s the outlook for shale activity that typically drives relative performance between HAL and SLB, the two largest diversified oil services providers in the world.

The fixation on HAL’s North American business isn’t entirely justified as the company does have a large international business that, as I showed you earlier, has been showing steady growth even as North American revenues have come off their peak in late-2022 and early last year.

A major topic in the international services business this year is that the Saudi government ordered its national oil company, Saudi Aramco, to halt a plan to boost its total maximum oil production capacity from 12 to 13 million bbl/day by 2027. Saudi Arabia has been developing a series of projects in recent years and Aramco’s spending is a significant, growing source of revenue for oil service majors including SLB and HAL.

The obvious concern: Could Saudi’s decision be the leading edge of a significant slowdown in activity and capital spending outside North America?

In my view, this fear is even more overblown than near-term concerns about the cycle in North America. SLB is the oil service company most directly exposed to Saudi activity and management there issued a press release hours after the Saudi announcement.

Simply put, SLB reaffirmed its guidance for 2024, noting that the Saudi decision has no impact on projects currently underway. Rather, Saudi is suspending two offshore projects that have not yet started up.

It also seems that Saudi Arabia is shifting some of its activity and spending in favor of developing onshore natural gas fields in the Kingdom. And the fact is that developing natural gas fields in Saudi Arabia isn’t about exporting gas, it’s a stealthy way of increasing Saudi crude oil exports.

That’s because Saudi Arabia still generates a significant portion of its electricity via oil-fired generation facilities. According to data from the Energy Institute Statistical Review of World Energy 2023, Saudi Arabia generated 131.4 terawatt-hours of electricity from oil in 2022, the most of any country in the world and about one-third of its electric generation in the same year.

By building a new natural gas generation capacity, designed to use gas produced within Saudi Arabia, the country can reduce domestic oil demand, freeing up as much as an additional 1 million bbl/day of oil for export by 2030.

And HAL’s own comments on its Q4 2023 call suggest growth in international CAPEX and activity is broad-based by geographic region. CEO Jeff Miller noted that HAL has been having discussions with international clients regarding projects that won’t begin until 2025 or 2026 and have durations of 3-4 years. That gives HAL increased visibility and confidence in international revenues and growth through the end of the decade.

Nevertheless, this remains an incremental sentiment risk for all services firms in the near term.

Conclusions and Long-Term Target

As I indicated, I’m rating HAL a hold for now due primarily to the headwinds posed by widespread concerns over revenue momentum and margins in the company’s massive, differentiated North American services business.

I believe risks to the stock will be elevated around the company’s quarterly earnings reports through the middle of this year, including their earnings announcement due out this week (April 23). Their statements will be parsed for any signs of softness in demand or a loss of pricing power in North America.

Earnings results from the likes of ProFrac discussed earlier, and due to report on May 9 could also represent a headline risk for HAL.

Regardless, my view remains that HAL’s North American business is well-positioned to benefit from more stable growth and profitability due to its ZEUS e-frac offering and the ongoing shift in its customer base in favor of larger, more disciplined producers. The company will also benefit from ongoing growth in CAPEX outside the US; while HAL’s international business isn’t as large as SLB’s, it’s one of the largest in the world and is showing broad-based growth.

Let’s take a rough look at what HAL could be worth moving into 2025:

During HAL’s Q4 call, management indicated North American revenues and margins would be flattish in 2024 from 2023 levels, so I’ve penciled in -2% growth in 2024 based on the recent pullback in North American activity.

Management also indicated international revenues were up “low-double digits,” so I penciled in 10% growth in revenues outside the US. That adds up to overall revenue growth of 5.4% to $24.265 billion in 2024, which is close to in line with the Wall Street Consensus per Bloomberg of $24.26 billion.

I’m assuming a flat EBITDA margin for 2024, in line with the 2023 level. As for free cash flow, HAL indicated that it would expand “at least 10%” from the 2023 level, which implies an FCF margin of 10.3% in 2024 on my revenue estimates, slightly higher than in 2023. That makes sense as HAL has been focused on holding annual CAPEX at about 6% of revenues over the long haul, which has had the effect of increasing its free cash flow margin in recent years.

For 2025, I’m factoring in the return of some modest growth in North America, around 5%, due to the potential for an inflection in drilling and completion activity into 2025 along the lines I outlined earlier. I’ve maintained international revenue at +10% based on steady growth in that business.

Based on these (rough) estimates and flat margins, HAL’s EBITDA could expand to over $5.7 billion in 2024 and $6.15 billion in 2025.

Based on monthly data, HAL’s average enterprise value to one-year forward EBITDA multiple over the past two years has been around 8x, and if we apply that multiple to our 2025 EBITDA estimates we derive a value of $47.75 per share for the stock, a 22% premium to HAL’s close last week.

I see these estimates on the conservative side for 2024; however, I am penciling in the resumption of significant growth for 2025. I believe the potential for growth in 2025 is unlikely to get much credit in markets until the second half of this year as we see some signs of a ramp in shale-directed activity and further signs of stable growth internationally.

Bottom line: North America headwinds will likely restrain the stock through the first half of 2024 though I believe we’re setting up well into 2025 and a 12-month target in the upper $40s as I’ve outlined seems reasonable.

For now, HAL is a hold until we get confirmation of that second-half turn.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Halliburton: Long-Term Value In Shale Transformation appeared first on Up2info.com.

• Rising oil prices due to OPEC+ policies and geopolitical issues are benefiting companies in the oil and gas industry, including Halliburton.
• Halliburton has seen impressive stock performance, outpacing the S&P 500, but further upside is warranted.
• The company’s recent financial performance has been positive, with revenue, profits, and cash flow improving year over year, and analysts have slightly bullish expectations for its upcoming earnings release.

Because of restrictive policies being implemented by OPEC+, as well as geopolitical issues like those involving Russia and Ukraine, on top of Israel and Gaza, oil prices have been on the rise. It also helps on that front that demand continues to grow. And absent something significantly negative happening, that trend will likely continue. While this may bode poorly for your wallet, it most certainly is positive for many companies out there, particularly those engaged in oil and gas producing activities.

One firm in this market that focuses on providing products and services to the energy industry and that is bound to continue benefiting from strength in this market is none other than Halliburton (NYSE:HAL). With a market capitalization of $34.07 billion as of this writing, Halliburton is a large enterprise. Its reach is global and, in recent years, financial performance has been quite positive. Shares are also attractively priced. This is in spite of the fact that, over the past few months, performance achieved by the stock has been very impressive. You see, when I last wrote about the business in January of this year, I ultimately rated it a ‘buy’ because of how robust results had been and how cheap shares were. But since then, the stock has risen by 13.7%, far outpacing the 4.4% rise seen by the S&P 500 over the same window of time.

Strong upside that significantly outpaces the market can’t happen forever. But it can happen for a while. Based on how things stand today, I would argue that additional upside is likely on the table for the company. However, that picture can always change. If it were to change, the most likely time would be after an earnings release. And it just so happens that management is expected to announce results for the first quarter of the company’s 2024 fiscal year before the market opens on April 23. Leading up to that point, analysts seem to be slightly bullish. So I don’t think we will see any negative developments in the near term. But there are certain things investors should be paying attention to as those earnings near.

A look at Halliburton’s recent performance

Operationally speaking, Halliburton is a large enterprise. It boasts over 48,000 employees spread across over 70 countries. While the company has many different facets, its operations can really be boiled down to two segments. The first of these is the Completion and Production segment, which helps to complete wells in the oil and gas space and get them producing. Activities here include cementing, providing completion tools like line hanger systems and sand control systems, providing chemicals and various services related to them, offering up pipeline and processing services, engaging in artificial lift services, and more. And the other segment is called Drilling and Evaluation. Its emphasis is on providing field and reservoir modeling, drilling, and other related services. It also provides certain fluids that make all of this possible. Some of its offerings even include software such as cloud based digital services and AI solutions, that theoretically should make the exploration and production market easier.

Using data from 2023, about 41% of the company’s revenue comes from its Drilling and Evaluation segment. The largest chunk, however, about 59% in all, comes from the Completion and Production segment. Geographically speaking, the firm is very much focused on the US market. North America as a whole accounts for about 46% of revenue. However, this is a global enterprise with a far reach. This has allowed it to build up an extensive list of clientele. As a result, about 25% of revenue comes from the Middle East while 17% comes from Latin America. The remaining 12% is split between places like Europe, Africa, and elsewhere.

When I last wrote about the company, we had data covering through the third quarter of the 2023 fiscal year. Now that data extends through 4Q23. What that quarter showed was continued growth achieved by management. Revenue, for instance, totaled $5.74 billion. That’s up 2.8% compared to the $5.58 billion generated the same time of the 2022 fiscal year. This increase was in spite of the fact that Completion and Production revenue for the company dropped by about $170 million, or 5%, compared to what it was in the third quarter of the year.

Management attributed this weakness to reduced stimulation activity in the US land and Mexico markets, as well as lower artificial lift activity in the US land space. A decline in completion tool sales throughout Latin America also contributed to the pain. The real growth, then, came from the Drilling and Evaluation market. Revenue jumped by about $105 million, or 5%, compared to the prior quarter. Strong demand for software in the Middle East and Asia, as well as throughout Africa and Latin America, helped the company immensely. The company also benefited from higher fluid sales in various countries, including those in the western hemisphere and Africa. The picture would have been better had it not been for weather related reductions in drilling activity in Norway. But you can’t expect perfection everywhere.

With revenue rising, profits followed suit. Net income inched up from $656 million to $661 million. Operating cash flow grew even more, jumping from $1.16 billion to $1.41 billion. If we adjust for changes in working capital, however, we do get a more modest increase from $971 million to $1.12 billion. And finally, EBITDA for the enterprise expanded from $1.14 billion to $1.31 billion. This robust quarter helped results for 2023 in its entirety. This much can be seen in the chart above. In it, you should notice that revenue, profits, and cash flow metrics, all improved for the company year over year.

The fact of the matter is that Halliburton can and does benefit from increased oil and gas activities. As I covered in two articles recently, the first one here and the second one here, the bullish case for oil markets at least remains intact. It’s even possible that prices will rise from here. Most notably, we do seem to have a problem when it comes to DUC (drilled but uncompleted) wells. You see, the vast majority of the cost of establishing a productive well involves the drilling side of things. By comparison, completing the wells is fairly cheap. But ever since peaking back in 2020, the number of DUC wells has been on the decline. This has been because of an uptick in both drilling and completion activities. However, completion activities have outpaced drilling ones.

At some point, this decline in DUC wells will have to result in additional drilling and completion. Obviously, the drilling has to come first. But regardless of that timeline, it’s clear that companies like Halliburton will benefit. Of course, after staging a strong recovery following the worst days of the COVID-19 pandemic, we did eventually see a decline in activity here at home. In March of this year, for instance, the number of drilled wells totaled 868. That’s down from the 1,027 reported one year earlier. And the number of completed wells managed to drop from 1,093 to 859 over the same window of time.

This weakness has also been reflected in the number of drilling rigs in operation. The most recent data provided by Baker Hughes (BKR) has the number, as of April 12th of this year, at 617. That’s down 131 from what was seen just one year earlier. But at some point, these numbers will increase. Meanwhile, in international markets, we are already seeing some nice increases when it comes to drilling rig activity. In the most recent data provided, the number of wells internationally hit 971. That’s up 13 from the prior month, and it’s up 41 from what it was one year earlier.

I would make the case that, even if activity does not pick up in this space, shares of Halliburton warrant upside. To see what I mean, we need only look at how shares are priced. In the chart above, you can see this using data from both 2022 and 2023. It’s wonderful to see a company trade in the mid to high single digits. I then compared Halliburton to five similar firms in the table below. On a price to earnings basis, two of the five were cheaper than it. But this number drops to one of the five when using the price to operating cash flow approach and the EV to EBITDA approach.

Click to enlarge

While shares are cheap at the moment, the picture can certainly evolve. And it just so happens that, before the market opens on April 23, management will be announcing financial results covering the first quarter of the 2024 fiscal year. Even though US drilling activity seems to be down year over year, analysts anticipate revenue coming in at about $5.68 billion. That’s virtually flat compared to what was seen the same time last year. Earnings per share, meanwhile, are expected to climb from $0.72 to $0.75. If this turns out to be correct, it would translate to an increase in net profits from $651 million to $676.5 million. In the table below, you can also see some other profitability metrics that investors should be paying attention to. If earnings do increase year over year, it wouldn’t be crazy to expect these to improve slightly as well.

Takeaway

Based on all the data provided, I continue to be amazed at how cheap shares of Halliburton remain. Yes, the stock has comfortably outperformed the broader market as of late. But the stock is still attractively priced, especially if we assume that current market conditions are reflective of what the next couple of years will look like. Shares are cheap on both an absolute basis and relative to similar firms. Analysts have slightly bullish expectations, though I wouldn’t be surprised if management exceeds these. Add all of this together, and I believe that the ‘buy’ rating I assigned the stock earlier this year is still appropriate.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Halliburton: Shares Look Cheap As Oil Markets Surge appeared first on Up2info.com.

• We take a more in-depth look at the fundamentals of Halliburton with Lyn Alden.
• Lyn recommends companies with long-lived reserves, such as this pick.
• Halliburton is well positioned to benefit from this current upswing in the energy sector, and potentially outperform its peers.

By Levi at Elliott Wave Trader; Produced with Avi Gilburt

After such a torrid run up from the major low that was seen in the Fall of 2020, it was time for the entire Energy sector to rest. And, rest it did. Many names simply consolidated over time, others pulled back deeper via price. But, as a whole, we are now quite positive on the sector. However, there can be some names that are more favorite than others. Take a look with us at Halliburton (NYSE:HAL). We’ll delve into the fundamentals with Lyn Alden. Then, Zac Mannes and Garrett Patten will help interpret the structure of price via the charts.

Lyn Alden Dives Into The Fundamentals

“Overall, the energy sector continues to be an uncrowded and under-owned space by most investors, and pays good dividends to those who hang around for the ride. Energy prices don’t need to blow out for these companies to produce attractive total returns from these levels. My preference is toward companies with long-lived reserves.

The two main risks to that thesis as we look out for the rest of the decade are either 1) lower than expected global demand or 2) higher than expected global output. I expect gradual demand increases and supply increases with risks of supply disruptions here and there, but overall for energy prices to push upward in large part because the denominator (currency) is falling.

So, one way to protect the thesis is to own companies that benefit from greater production. I view higher than expected supply as a more likely risk than major demand destruction, and so that’s the side I prefer to have more protection on.

In my recent deep dive report, I emphasized Halliburton as another way to play the energy sector in addition to the producers. As the world’s marginal new oil production becomes increasingly unconventional, it becomes increasingly necessary to use advanced technologies and to find and eliminate every possible inefficiency in the process, and that’s where companies like Halliburton serve a function.

Fundamentally, HAL is inexpensive and analysts expect ongoing earnings growth for this cycle:

*F.A.S.T. Graphs 101*

*Black line: the current and historical stock price

*Blue line: what the stock price would be if were at its historically average price/cash-flow ratio

*Orange line: a conservative measure of valuation (a 15x price/cash-flow in this case)

*White line: dividends paid that year (and the payout ratio is relative to the orange line)

*Dark/light green: the transition between historical earnings numbers and consensus analysts’ forecast earnings numbers

The company has been reducing its net debt, and has termed out its debt rather well:

I’m bullish on HAL and would be willing to accumulate on dips. As long as it keeps making higher highs and higher lowers, it looks rather constructive on the technical chart. If at some point it breaks down through recent lows, then it’s worth re-assessing the thesis.” – Lyn Alden

The Structure Of Price Speaks Via The Charts

Our lead analysts, Zac Mannes and Garrett Patten, scour over literally hundreds of charts a day. When a sector is found that may be readying itself for an imminent turn either up or down they will then drill down into specific names that may outperform other names in that same sector. Please see the charts below and note the potential overhead targets for HAL as well as the levels where it would invalidate this scenario.

First, please note the (OIH) chart, Now, keep in mind that this is from a few weeks back when we once again began to beat the drum in favor of the Energy sector.

HAL is in this specific ETF with a decent amount of exposure. But, what are the specific levels to watch on the HAL chart and what is the possible target level overhead? Let’s take a look at Garrett’s daily chart:

Very quickly, one can easily glean that for as long as the last low at $33 or higher holds then price can reach up for the $70 target zone, obviously over time. Here’s the near term view from Zac:

The interim target is at about the $45 level. Thereafter, price will likely consolidate and pull back as illustrated here. Risk can be defined by that low shown at the $33 level. Should price move back under that then we would reconsider our near term bullish projection.

“This All Just Seems So Subjective . . .”

Quite frankly, this can be found true. When you have seen other ‘expert’ practitioners of Elliott Wave Theory that craft a count to match their bias, it certainly can be the case. So, how can we remove as much subjectivity as possible from the use of this tool? Avi Gilburt had that same question as he began a deep study of the methodology. Included below is a brief excerpt of an article from our Education section that shares the key.

“While I was learning Elliott Wave on my own, I was trying to obtain a more ‘track-able’ and ‘tradable’ understanding of the fractal nature of the markets. This is probably what many struggle with the most. Specifically, it is when we say that within a 5 wave move, each impulsive wave breaks down further into 5 waves each, with some waves becoming extended.

Well, after much analysis and observation, I identified a standardized method to trade waves 3-5, once waves 1 and 2 were in place. Now, remember that this is a standardized method that is a most common phenomenon in the market, but markets can and do vary from this standardized presentation. In fact, when we deal with commodities or the VXX, often, we see extensions that far surpass the standardized extensions I present here. But, again, this scenario is seen very often in the markets and individual stocks, so I believe it is worthwhile to have a basic understanding of this structure to build upon.

This is something that I observed within the Elliott Wave structure, and have adapted it to a trading methodology, which I lovingly call Fibonacci Pinball.” – Avi Gilburt

Do You Have A System In Place?

Those who have experience forged by time in the markets will tell you that it’s imperative to have a system of sorts in place. You need to be able to define how much you are willing to risk vs. how much gain is likely. Those who survive across the decades in the greatest game on earth will also inform you that the preservation of capital is paramount.

While there are multiple manners of doing this, we have found Fibonacci Pinball to be a tool of immense utility for traders and investors alike. It is this system, or methodology, that is pointing higher for Halliburton in the near term. The $70 price target can be achieved. However, in the meantime, we will be vigilant in our monitoring of its progress.

Conclusion

There are many ways to analyze and track stocks and the market they form. Some are more consistent than others. For us, this method has proved the most reliable and keeps us on the right side of the trade much more often than not. Nothing is perfect in this world, but for those looking to open their eyes to a new universe of trading and investing, why not consider studying this further? It may just be one of the most illuminating projects you undertake.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in HAL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

STOCK WAVES: Where fundamental analysis meets technical analysis for highest-probability investment opportunities! Get leading Elliott Wave analysis from our team, along with fundamental insights and macro analysis from top author Lyn Alden Schwartzer.

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The post Halliburton: We Are Drilling Down For The Winners In Energy (Technical Analysis) appeared first on Up2info.com.

• Halliburton achieved record margins in 2023 and is expected to continue increasing average revenue per rig.
• The oil market is projected to be balanced in Q2-Q3 2024, leading to a downward revision in the forecast for the average Brent oil price in 2024.
• Despite a reduction in drilling rigs and oil production volumes in the US, Halliburton’s financial results are expected to remain positive.

Investment thesis

We have covered Halliburton (NYSE:HAL) before and in Q4 2023 the company reported according to our expectations, and the forecast logic has been maintained. In this report, we present the adjustments we have made to our forecast, in particular taking into account changes in the forecast for oil prices, oil production volumes in the United States, and rig count.

Thanks to effective price increases for its services and the use of high-tech products, the company managed to achieve record margins in both the construction and production (20.7%) and drilling and evaluation (16.5%) segments in 2023. We expect demand for the company’s services to remain strong at current oil prices, and the market for high-performance equipment and quality services to remain tight, allowing Halliburton to continue increasing average revenue per rig. The rating is BUY.

Oil market balance and Brent oil prices

In November 2023, Arabia extended the production cut program by 1 mb/d for Q1 2024. Some other OPEC+ countries will also voluntarily reduce production in this period. We expect that in Q1 2024, excluding oil production in Russia and Venezuela, OPEC+ countries’ oil production will decrease by 0.1 mb/d as of December 2023 (in Russia we expect a 0.2 mb/d decrease in production, and in Venezuela – a 0.1 mb/d increase compared to December).

Further, in 2024, OPEC+ will gradually remove voluntary restrictions on oil production. We expect the oil market to be generally balanced in Q2-Q3 2024 due to OPEC+ actions. We have slightly revised upwards our forecast for OPEC+ oil production in Q1 2024 due to higher than expected production in December and Angola’s withdrawal from the agreement. This did not significantly affect the forecast for the market balance.

We now expect the oil market to be in deficit on average in Q1 2024 (with an expected surplus in January) and the oil market to be balanced on average in Q2-3 2024 (we previously expected an average surplus from Q2 2024 onwards).

We have therefore revised downwards our forecast for the average Brent oil price in 2024 from an average of $88.6/bbl to $86.8/bbl.

US oil production

The US continues to break records. In Q4 2023, the average production level in this country amounted to 13.22 mb/d, according to the EIA report. Such a rapid increase in production (+900 mb/d for 2023) is due to higher oil production per well, as well as the use of drilled but uncompleted wells (DUCs), the number of which decreased by ~200 units in 2023.

EIA forecasts U.S. oil production to be 13.03 mb/d in Q1 2024 and then to rise to 13.18 mb/d by year-end before turning to steady growth in 2025 at a faster pace compared to the 2024 forecast.

Due to the projected decline in oil production in 2024, compared to 4Q 2023, we expect US drilling rigs to decline to an average of 560 units in 2024 vs. the old forecast of 668 units, and to 757 units in 2025 vs. the previous estimate of 784 units.

Financial results

In Q4 2023, the average revenue per rig in the Construction & Production segment was $3.78 mln (+12% YoY) per rig vs. our forecast of $4 mln, and in the Drilling & Evaluation segment it reached $2.62 mln (+1% YoY) per rig vs. our forecast of $2.54 mln, which was broadly in line with our guidance.

We expect the average revenue per rig to reach $4.03 mln (+7% YoY) per rig in 2024 in the Construction & Production segment and $2.72 mln (+8% YoY) per rig in the Drilling & Evaluation segment, changed from our previous forecasts of $4.21 mln and $2.61 mln, respectively. The decrease in the forecast was driven by a downgrade in our 2024 oil price forecast from $88.6/bbl to $86.8/bbl.

We have revised our EBITDA guidance downwards from $5424 mln (+7% YoY) to $5212 mln (+3% YoY) for 2024 and upwards from $5685 mln (+5% YoY) to $6112 mln (+17% YoY) for 2025 due to:

• reduction in the forecast for the number of drilling rigs in North America in 2024 from 831 units to 704 units and in 2025 from 975 units to 954 units due to a decrease in the rate of increase of oil production in the US;
• decrease in the aggregate average ticket in 2024 due to lower oil price forecasts;
• increasing the operating margin forecast from an average of 16.3% to 17.6% over 2024-2025 due to the development and utilization of high-tech products.

The company’s free cash flow forecast is $2711 mln (+16% YoY) in 2024 and $2678 mln (-1% YoY) in 2025. FCF yield will reach 9% in 2024 and 2025.

We expect the company’s net debt to decline from $5372 mln in 2023 to $2661 mln (-50% YoY) in 2024 and to ($17) mln in 2025, assuming the company allocates all cachet to debt repayment. The net debt-to-EBITDA ratio is 1.1x in 2023 and we expect this ratio to reach 0.5x in 2024, which is consistent with the company’s low debt burden.

Valuation

We have revised our target share price downwards from $50.6 to $49.4 due to:

• the reduced EBITDA forecast for 2024;
• the shift of the FTM valuation period.

Based on the new assumptions, we maintain the BUY rating.

The main risk associated with this stock is a correction in oil prices, which would lead to a decrease in the number of operating drilling rigs. A significant reduction in the number of drilling rigs could not be offset by an increase in average revenue per rig and would lead to a decrease in the company’s financial results and stock prices.

Conclusion

Despite the downward revision of the number of drilling rigs and oil production volumes in the United States, the dynamics of financial results in our forecast remain positive. The company achieved record margins in both the construction and production and drilling and evaluation segments in 2023. We expect continued growth in the company’s average revenue per rig.

We believe the company has solid fundamentals and is now traded at prices that are significantly below its fair value.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Halliburton: Beneficiary Of Oil Rising Production appeared first on Up2info.com.

• Halliburton reported record free cash in Q4 2023 and expects a 10% boost in 2024, leading to a 10% rally in the stock.
• The company’s shift towards high-tech AI has increased its profitability and resilience, generating more cash per share.
• The potential catalyst for Halliburton stock is its position as the number one provider of fracturing services in North America, with the demand for Zeus frac spreads rapidly increasing.
• We rate the company as a buy at current levels.

Introduction

Halliburton Company (NYSE:HAL), also known as “Big Red” reported record free cash in its fourth quarter, and year-end 2023 investor call, and expects a 10% boost in 2024. They gave an optimistic outlook for the year ahead. The stock rallied nearly ~10% on this news over the next couple of days. Then the laws of the physical universe reasserted themselves, and gravity pulled Halliburton stock back down to earth. Why? People aren’t paying attention to the real fundamentals of the company, as I will explain in this article.

This has been a repetitive cycle since the middle of 2022, when it became clear that the Russian/Ukrainian conflict was not going to widen into Western Europe anytime soon. Halliburton has tagged the low $40’s three times since that period, and then crashed to the $30 level twice, each time ignoring progressively better reporting metrics. It is now within a few dollars of tagging $30 again. The question before us is this a buying opportunity?

The analysts are nearly unanimous that Big Red is a buy. Price targets range from $32 to $54, with a median of $48, suggesting that the bulk of these worthy folks think Halliburton stock has some room to run.

The company has been on a roll the last few quarters, beating EPS estimates for the last 4 earning periods. The forecast for Q-1, 2024 is for $0.75, a five cent reduction from Q-4, or ~6%. Where does all of this put an entry point for Big Red? And, more importantly, is there a catalyst on the horizon to deliver growth in the upper range of the analyst’s estimates.

The changing oilfield landscape

For the big, integrated oilfield service companies, of which Halliburton is one of a select group, there has been a shift in business models away from low tech big iron to high-tech AI. AI is in just about everything, and it makes a huge difference in the company’s profitability. One of the impacts on HAL is that this shift has dramatically increased their ROCE as the graph below indicates.

The point of the graph above is to establish that Halliburton has a resilient business model that is and will continue to generate heaps of cash-even in market downturns. This turn for the better also shows up in the free cash generated per share. The share count has remained much the same for the period covered. Free cash per share has nearly doubled in that time.

OFS companies like Hally run real businesses now, unlike most of the period where I was active in the industry. For most of that time, capex and hiring would increase to meet perceived demand, with cash commitments that went on even when business declined. With the new capital lite, and capital restraint models, expansion comes only with iron-clad customer commitments-often for multi-year deals. The shift to subscription Software as a Service-SaaS AI further insulates the company from sudden revenue and cash flow declines. You can see it in the graph above. This comment from Jeff Miller, CEO, sums up the new paradigm fairly well-

We see an increase in service intensity everywhere we operate. Whether it’s longer laterals in North America, smaller and more complex reservoirs in mature fields or offshore deepwater, customers require more services to develop their resources, not fewer. For our international business, we expect low double-digit growth driven by the power of our value proposition, global competitiveness across all product lines and our profitable growth strategy. In North America, we expect a continued strong business driven by stable activity, our differentiated technical position with our Zeus electric frac solution and the increasingly contracted nature of our business.

A near term catalyst for Hally

The Zeus electric frac solution is a strong potential catalyst for Halliburton stock. According to my industry sources, the company is the number one provider of fracturing services in North America, with nearly a quarter of the North American frac footprint. Demand by customers for Zeus frac spreads is rapidly displacing their legacy diesel and even Tier-4 DGB fleets. It comes with a decidedly different marketing model. Zeus’ fleets are now comprising 40% of their footprint, and going to 50% in 2025, Jeff Miller describes the role Zeus will play as it becomes a larger portion of the entire fleet-

Number one, that the pricing is sticky, but it’s sticky because it’s contracted over time and the value is thought about. And so sophisticated procurers can look at that and model that, and we can model it as well and comfortable with the value created.

But I think the second thing, as we think about what types of customers look at e-fleets, these aren’t a spot market solution. I mean the companies that are interested in e-fleets are those that have steady programs, work through cycles, have a clear vision of where their business needs to go and are willing to commit to the technology to deliver that over the long term.

And so — and really, it’s an entire system. If we think about an electric fleet, it’s — obviously, it’s an efficient, lowest-TCO electric solution, but it’s also automated, which drives the level of precision around fracking that I’ve never seen before. And so the clients know that they’re delivering what they expect to deliver, and then finally, the subsurface measurement. Finally, we don’t build fleets until we have contracts for fleets. And so that’s a different — completely different environment than maybe we would have seen in prior cycles from Halliburton

The fracturing business is undergoing consolidation with Patterson-UTI Energy, Inc., (PTEN), absorbing NexTier last year after a long list of prior acquisitions-Alamo, Keene, C&J Energy Services, Rockpile, and Trican U.S. The year before ProFrac Holding Corp., (ACDC) took out FTSI, and U.S. Well Services. This will have the effect of further tightening a market where no one builds new equipment, except for displacing older, hard to market diesel fleets. Barriers to new entrants-extreme cost and high-performance specs of the E-Fleets, will assist frac service providers in maintaining pricing.

This year the frac spread count has gone from 234, to 260 with the 10 spread rise of last week, as reported by Primary Vision in the American Oil and Gas Reporter. With 23% of the market, this adds another 6 spreads in the field for Halliburton, and puts another $12-15 mm per spread on the company’s top line on an annualized basis. Minimum.

Q4, 2023 and full year

Halliburton’s total revenue for the fourth quarter of 2023 was $5.7 billion, flat when compared to the third quarter of 2023. Total revenue for the full year of 2023 was $23.0 billion, an increase of $2.7 billion, or 13% from 2022. Halliburton generated about $2.3 billion of free cash flow during the year, retired approximately $300 million of debt, and returned $1.4 billion of cash to shareholders through stock repurchases and dividends. Net debt now stands at 1X EBITDA. Hally also raised their dividend to $0.17 for the fourth quarter.

Operating Segments

Completion and Production

Completion and Production revenue in the fourth quarter of 2023 was $3.3 billion, a decrease of $170 million, or 5%, sequentially, while operating income was $716 million, a decrease of $30 million, or 4%. Margins remained flat to the third quarter. These results were driven by reduced stimulation activity in U.S. land and Mexico, lower artificial lift activity in U.S. land, and decreased completion tool sales in Latin America. Partially offsetting these declines were higher year-end completion tool sales in the Gulf of Mexico, Africa, and the Middle East.

Drilling and Evaluation

Drilling and Evaluation revenue in the fourth quarter of 2023 was $2.4 billion, an increase of $105 million, or 5%, sequentially, while operating income was $420 million, an increase of $42 million, or 11%. These results were driven by improved software sales in the Middle East/Asia, Africa, and Latin America, along with increased fluid services in the Western Hemisphere and Africa. Partially offsetting these improvements were weather related reductions in drilling-related activity in Norway.

Guidance

In 2024, Hally expects international E&P spending to grow at a low double-digit pace and foresees multiple years of sustained activity growth. The MEA region was a bright spot in 2023, rising 7% YoY. The company believes the Middle East/Asia region will likely experience the greatest increases in activity, with other regions closely behind.

Looking out to 2025, Hally expects Africa and Europe, among others, to demonstrate above-average growth. Jeff Miller, CEO, noted in the call-

Beyond 2025, there is an active tender pipeline with work scopes extending through the end of the decade, which gives me confidence in the duration of this multiyear upcycle. We expect asset-intensive offshore activity to increase, which will further tighten the market. As offshore represents over half of our business outside North America land, we expect this activity to drive improved pricing and higher margins for our business.

Company filings

Noteworthy announcements in the press release

Halliburton introduced EquiFlow® Density autonomous inflow control device (AICD). This first-of-its-kind device addresses reservoir fluid uncertainties and allows the operator to enhance hydrocarbon recovery in wells where current autonomous technologies are limited. EquiFlow Density uses an innovative density amplifier designed to differentiate reservoir fluids. It incorporates a fluid selector to magnify density forces by creating artificial gravity while making the device completely orientation neutral. The fluid selector opens or closes autonomously to restrict water without any surface intervention. The tool provides a meaningful reduction in water influx, which is typically treated at the surface.

This is a big deal. Read the above quotation carefully. This device can selectively produce hydrocarbons, and leave connate water in the reservoir. This avoids prematuring watering out of the reservoir-blocking oil production, and eliminates treating and disposal issues at the surface. What would you pay for a tool like this? Millions? Yep.

Halliburton and Core Laboratories Inc. announced a strategic collaboration in the U.S. to compress the delivery time of cutting-edge comprehensive digital rock data solutions from months to weeks, even while full petrophysical laboratory measurements are in progress. This collaboration combines Core Lab’s industry-leading expertise in reservoir description and optimization technologies with Halliburton’s specialization in pore-scale digital rock analysis. The collaboration facilitates the seamless integration of best-in-class digital rock characterization at a nano, micro and macro level, which will enable U.S. clients to run pore-scale simulations in parallel with physical laboratory experiments. These enhancements will drive the accuracy and innovation of new and existing digital rock characterization workflows.

This is an area of specialization for me. I’ve spent hours pouring over geophysical results. These investigations look to find, among other things, damage mechanisms. There is no doubt this alliance with Core Laboratories Inc., (CLB) will pay off in the offshore upcycle.

Halliburton, and AIQ, joined with ADNOC to successfully launch an AI-enabled Autonomous Well Control solution, RoboWell, across the ADNOC’s North East Bab asset in Abu Dhabi, United Arab Emirates. The project, which is the first ever AI-supported Advanced Process Control solution for gas lifted wells, enables autonomous wells that can self-adjust to maximize production within specified operating conditions. The RoboWell system utilizes real time data to continuously react to changing oil field dynamics, and to optimize production processes, as well as ensure operation within safety parameters to minimize well instability and reduce the risk of stoppages or other incidents.

It’s coming. Someday soon, you will walk out to the driller’s cabin on the rig floor, with a cup of coffee for the driller, and find Robby the Robot. I hope he likes it black.

Risks

Halliburton is beaten down at this level, and other than dead money, I don’t see a lot of risk in the stock.

Your takeaway

Halliburton’s stock is trading at 7.2X EV/EBITDA, just a little out of our normal comfort zone. Depending on what markets do in Q-1 we might see slightly better pricing, but that could go the other way as well.

Let’s have a little fun with numbers and drag out our Rockwell calculator again. Hally grew EBITDA 23% between 2022 and 2023. Let’s give them 15% growth for 2024 and see where the share price should adjust toward. ($36 bn / $5.85 bn = 6.2X). To keep their multiple at 7.2X the shares would need to reprice to ($5.85 bn x 7.2X =$42,120 bn/ 902 mm shares = $46 per share. Pretty close to the analyst’s $48 midpoint consensus.

I think Hally is in the buy zone at current prices and represents a reasonable risk/reward thesis. Given the current flux in oil and gas prices, I am not adding at present levels-I may kick myself later on, but I am hoping we might see the low $30’s again. At something under $32, I would pull the trigger with an incremental buy for growth and increasing shareholder returns.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of HAL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This is not advice to buy or sell this stock or ETF in spite of the particular rating I am required to select in the SA template. I am not an accountant or CPA or CFA. This article is intended to provide information to interested parties and is in no way a recommendation to buy or sell the securities mentioned. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to do their own due diligence before investing their hard-earned cash.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The Daily Drilling Report

The post Halliburton: The New AI Paradigm In Oilfield Services appeared first on Up2info.com.

• Halliburton’s stock has performed well due to strong cash flows driven by high energy prices and robust demand for its services.
• The company has seen significant growth in revenue and profits, with the Completion and Production segment leading the way.
• Analysts expect positive financial results for the final quarter of the 2023 fiscal year, with revenue and earnings per share forecasted to increase.
• Shares are also cheap at this time and further upside is likely, both for shares and for demand for its services.

Things are going pretty well these days for Halliburton (NYSE:HAL), a company dedicated to providing completion and production services, as well as drilling and evaluation services, to the energy sector, not only in the US, but across the globe. High energy prices that have been driven by robust demand, cuts from OPEC, and geopolitical issues, have created a great opportunity for shareholders of the business to experience strong cash flows. Shares of the company look cheap at this time and it’s likely that the near term picture for the company will remain positive. Even analysts are forecasting good times ahead, with revenue and profits per share both expected to continue growing when the company reports financial results for the final quarter of its 2024 fiscal year. Given these factors, the company seems to be a solid ‘buy’ candidate at this time.

Things are going well

The last article that I wrote about Halliburton came out in July of 2022. In that article, I was performing an earnings review leading up to the second quarter earnings release for the 2022 fiscal year for the business. Leading up to that point, the market had been worried about the firm, as well as others like it, since energy prices were pulling back from their highs and concerns of a potential recession were mounting. Fast forward to today, and we never did see that recession. It is true that energy prices have taken a rather significant decline from where they were previously. But even with this, the stock was cheap enough to warrant some rather meaningful upside. Although the S&P 500 experienced more, with a gain of 23.1% since the publication of that article, the 19.3% rise seen by Halliburton is nothing to scoff at.

To understand just why the stock has moved up this much, we need only look at recent fundamental data. Briefly, we will touch on the 2022 results relative to 2021. But most of our efforts should be dedicated to the 2023 fiscal year given that more updated data is more relevant. Revenue for 2022 came in strong at $20.30 billion. That’s a whopping 32.7% above the $15.30 billion generated for 2021. Both of the companies operating segments performed well during this time. But the Completion and Production segment fared the best. Sales for it skyrocketed 37.7%, primarily driven by higher utilization rates and pricing for pressure pumping services, as well as additional completion tool sales and increased artificial lift activity in the markets in which the company operates. Higher well intervention services in North America and the eastern hemisphere also played a role. Meanwhile, the Drilling and Evaluation segment of the company reported a 26.6% increase in revenue thanks to higher drilling related services in most markets for the business, as well as increased wire line activity and testing services across the globe.

With the increase in revenue came higher profits. Net income rose only marginally from $1.46 billion to $1.57 billion. Operating cash flow increased from $1.91 billion to $2.24 billion. But if you adjust for changes in working capital, you get an increase of 60.5% from $1.85 billion to $2.97 billion. Also on the rise was EBITDA. Based on the data provided, it managed to jump from $2.65 billion to $3.94 billion. That’s a gain of 49.1% year over year.

After such a robust year and considering what has transpired with the oil and gas industry, it wouldn’t be surprising to see fundamental performance weaken. But that is not what has happened. For the first nine months of 2023, revenue for Halliburton totaled $17.28 billion. That’s 17.4% above the $14.72 billion reported the same time one year earlier. Once again, it was the Completion and Production segment that led the way with a gain of 23.5% year over year. By comparison, the Drilling and Evaluation segment reported a much more modest 9.4% rise in revenue. The same factors that led to the growth in 2022 relative to 2021 also played a role for the first nine months of 2023 relative to the same time one year earlier.

With the rise in sales came continued profit growth. Net income more than doubled from $916 million to $1.98 billion. Operating cash flow nearly doubled from $1.08 billion to $2.05 billion. On an adjusted basis, the growth was a bit less impressive, with the metric climbing 36.9% from $2 billion to $2.74 billion. And lastly, EBITDA for the enterprise grew from $2.44 billion to $3.77 billion.

The exciting thing for shareholders is that, before the market opens on January 23, the management team at the business is expected to announce financial results covering the final quarter of the 2023 fiscal year. This will give investors an opportunity to reevaluate the company to see whether the picture is improving, getting worse, or staying the same. If analysts are correct, then the end result should be positive. Revenue, for instance, is expected to come in at about $5.78 billion. That would be 3.5% above the $5.58 billion generated in the same quarter of the 2022 fiscal year. While this sounds disappointing compared to how the company performed for the rest of the year, consider that revenue growth in the third quarter on its own was only 8.3% compared to the same time one year earlier. Both segments expanded, but at a much slower pace, because of lower simulation activity in North America and a reduction in project management activity in Saudi Arabia.

Earnings per share, meanwhile, are forecasted to come in at about $0.80. That would represent a decent increase over the $0.72 per share reported the same time of 2022. That would translate to net profits climbing from $656 million to roughly $722 million. Analysts have not provided guidance for other profitability metrics. But in the table above, you can see what the most important metrics were for the company for the final quarter of the 2022 fiscal year. At the end of the day, it’s all about cash flow.

If analysts are correct about the final quarter of the year, then the company should generate total profits of about $2.70 billion. If we annualize results seen for the other profitability metrics, we should anticipate adjusted operating cash flow of about $4.07 billion and EBITDA of $6.10 billion. Taking these figures, I was then able to value the company as shown in the chart above. I then compared the financial metrics to five similar firms as shown in the table below. When it comes to both the price to earnings approach and the EV to EBITDA approach, I found that only one of the five businesses was cheaper than Halliburton. And when it comes to the price to operating cash flow approach, our prospect ended up being the cheapest of the group.

Click to enlarge

Regardless of the near-term picture, I fully expect that the long-term outlook for Halliburton will be positive. As I covered in a prior article, at least as far as the US market is concerned, the number of drilled but uncompleted wells have now fallen to a more-than 10-year low. The total number as of December of last year was 4,374. By comparison, the high point was the 8,874 wells that were drilled but uncompleted as of June of 2020. The fact of the matter is that, in order to save costs, oil and gas exploration and production companies in the US have worked away at their inventory in order to pump out as much oil and gas as possible while prices have been elevated. This has been great for cash flows. But as the number of wells completed have outpaced the number drilled, it has reduced DUC inventories. And at some point, additional wells will need to be drilled again in rather large quantities. The good news is that Halliburton wins either way. While the Completion and Production segment has outperformed the Drilling and Evaluation segment up to this point, that picture could change in the not-too-distant future. And with roughly 45% of the company’s revenue coming from North America, it’s a prime prospect to benefit.

Takeaway

Although I do not have any intention of owning shares of Halliburton at this time, the company does seem to me to be a rather attractive prospect. Shares are cheap and the business has some attractive opportunities that lie ahead. All combined, this makes it a solid ‘buy’ candidate in my book, leaving me with no choice but to keep it rated as such at this time.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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