Halliburton: Delivering On Its Comeback Promise

| About: Halliburton Company (HAL)

Halliburton (HAL) is making a strong comeback in the North American drilling market, from where it derives more than half of its revenue. It has launched a number of programs to enhance the well drilling process for oil field operators. One such project is Frac of the Future, which is designed to provide Halliburton cost advantage over its competitors in the North American drilling market. The company plans to implement this program on more than 20% of its fracking fleet, which would result in 30% cost savings in terms of maintenance and crew costs. In locations where Frac to the Future was deployed, capital cost reduced 20% and completion times reduced 40%. I expect the company will continue to derive efficiencies in its fracking fleet operations as it plans to roll out this program to 50% of its fracking fleet by 2015, helping it further increase the efficiency of its fracking fleet.

In addition to Frac of the Future, the company is also continuing its efforts on Battle Red, a program that focuses on digitizing the company's operations from drilling to well completions. This is expected to reduce the working capital requirements for the company. The following table shows the company's working capital requirement over the last three quarters of this year.

Year 2013

First Quarter

Second Quarter

Third Quarter

Current Assets ($ billion)

13.15

12.62

12.89

Current Liabilities($ billion)

4.67

4.78

4.76

Working Capital($ billion)

8.48

7.84

8.13

These two programs are going to benefit Halliburton in the coming quarters by improving its cost structures. Halliburton plans to improve its margin by 500 basis points from its North American operations.

Improvement of cost structure is an important step towards this target, because the pressure pumping market is still oversupplied. Halliburton derives around 40% of its global revenue from its pressure pumping service line. The North American pressure pumping market is oversupplied by around 20%, and this trend is expected to continue until late next year or 2015. The company expects the pressure on prices to persist since it is taking time for the oversupply of pressure pumps to reduce due to fracking service efficiency gains resulting in more wells per rig. Each North American active rig drilled around 5.4 wells during the third quarter of this year from 4.7 wells during the first quarter of last year. So, while the environment for pressure pumps remains challenging, Halliburton's plans to streamline its operations will payoff in the coming quarters.

Increasing efficiency of well drilling in North America should create more demand for technological services, which increases reservoir productivity. One such service offering from Halliburton is CYPHER, which helps increase the productivity of wells. This service helps in the identification of well location, drilling, and completion of well in a cost effective and optimized manner. In major oil and gas basins in the U.S., production increased 27% in the Utica formation, 24% in the Bakken formation, and 29% in the Niobrara formation, with the application of this service. The Exploration and Production, or E&P, spending is expected to increase 7% next year compared to a 3% increase this year. Since efficiency gains could provide better margins for oilfield operators, this would create demand for services that enhance oil well productivity. So, I expect that the increasing capital expenditure by oil companies combined with CYPHER's technological capabilities would drive revenue for Halliburton.

Deepwater drilling continue to strengthen

This month, Halliburton won contracts in Brazil for deepwater drilling, beating Baker Hughes (BHI). Baker Hughes' share of offshore drilling in Brazil is around 20% while Halliburton has a market share of around 50%. Baker Hughes also reduced its workforce in Brazil in response to its reduced market share in the region. The growth of the deepwater drilling market in Brazil is part of a bigger picture for Halliburton. Its deepwater drilling revenue grew at a compound average growth rate, or CAGR, of 31% from 2010 through this year while the oil service industry grew around 13% during the same period. The company aims to grow its revenue an additional 25% over the next three years through 2016. I expect that the deepwater drilling market will provide revenue opportunities in the coming quarters. According to Infield, the share of deepwater drilling out of overall drilling is going to increase from around 7% last year to around 10% through 2017, therefore increasing companies' capital expenditure. The major growth is expected to be in areas of Brazil, the Gulf of Mexico, and West Africa, together known as the "golden triangle." While Halliburton has developed a strong position in Brazil's offshore market, it remains to be seen how Halliburton will move into the Gulf of Mexico and West African deepwater markets.

The growing opportunities from deepwater drilling are enticing Schlumberger (SLB) to develop products and services focused for this market. In November, the company launched the Vx Spectra surface multiphase flowmeter for offshore production platforms. This device helps measure oil and gas flow rates from wells ranging between various ranges with the help of gamma rays. This device liquid flow rates could be measured upto 24,000 barrels per day while gas flow rates of upto 69 million cubic feet per day.

This device will enable operators to measure flow rates accurately and repeatedly. Additionally, this measuring device has the ability to save space on offshore platforms due to its design compared to conventional measuring devices. This device also helps reduce downtime and maintenance. These measurement devices are important for drilling in the complex deepwater environment where drilling cost can exceed $1 million per day. Around 200 new deepwater fields will enter into production from this year through 2017. These will be a major driver for these advanced measurement instruments.

Irresistible Commitment

Halliburton's plans for growth are clear. In the North American market, the company continues to be lean in its operation, resulting in an increase for its margin. Streamlining its operation has come at an appropriate time, since the North American onshore drilling market currently has a pressure pump oversupply. So while the market adjustment continues, Halliburton will emerge as an efficient operator. At the same time, the company is moving on with its Cypher service, which would help oil operators realize better margins due to increasing well drilling efficiencies.

The company is also expanding its operations in the deepwater drilling segment. While the deepwater segment is poised to grow in the coming quarters, Halliburton continues to strengthen in the key market of Brazil. With the commitment to increase its deepwater drilling service, Halliburton is expected to move into more deepwater markets. Halliburton's improving performance in North America and increasing foothold in the deepwater drilling market will make the company's stock a compelling choice for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article