Over the past few weeks Halliburton's (HAL) share price has slid just over 10%. Is this an excellent time to pick up shares in this oil services company? I believe it is.
Founded in 1919, Halliburton is one of the world's largest providers of products and services to the energy industry. With more than 75,000 employees, representing 140 nationalities in approximately 80 countries, the company serves the upstream oil and gas industry throughout the lifecycle of the reservoir - from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
Why the Buying Opportunity?
In a recent statement, CEO Dave Lesar implied that the North American utilization rate is currently oversupplied by 20%. CEO Dave Lesar continued by stating:
"The North American market continues to have excess supply of pressure pumping equipment, and although this is improving, we anticipate pricing pressure will continue as contracts review during the next quarter or so. Accordingly, we are already working on adjusting our cost structure."
As the chart below indicates, another force working against Halliburton and other companies in this sector like Schlumberger Limited (SLB) and Baker Hughes (BHI) is the seasonal decline. However, adding to the seasonal decline Halliburton is currently having some additional transitory issues. CEO Dave Lesar stated: "Due to the recent floods in Colorado and logistical disruptions in the Niobrara, where we have a very high market share, these will continue to impact our efficiency in cost structure in that basin. These cost inefficiencies should be fixed by the end of the year."
Moving forward the CEO has a positive outlook in 2014:
"Despite these transitory issues, we believe that we will see margin improvement as we go through 2014 for a number of reasons," including the new onshore drilling initiatives. "As we move into 2014 and based on early conversations with our customers, we are anticipating overall spend levels to increase. Our strategy is working well and we intend to stay the course."
According to a 20-year seasonal average supplied by equity clock, the fall months show weakness when compared to the S&P.
Catalysts for Continued Growth
1. Deep-water Drilling Market
Halliburton, which is a leader in the development of new technologies for deep-water drilling, has pushed the envelope with its engineering and technological advancements. Many of these advancements have opened up a greater amount of opportunities in areas such as the Pre-Salt region off the coast of Brazil, the Barents Sea in Norway and the U.S. Gulf of Mexico.
As more advanced technologies have created opportunities, that in turn has reduced costs and increased safety, it has become economical for companies to pursue deep-water reserves. Major E&P companies such as Exxon (XOM), Chevron (CVX), BP p.l.c. (BP) and Royal Dutch Shell (RDS.A) have increased their presence in deep-water regions. Exxon is expecting deep-water projects to account for 8% of its new source production over the next decade. Chevron is expecting deep-water projects to account for 40% of its new source production. BP p.l.c. is banking on the most as it is expecting 52% of its new source production to be from deep-water reserves over the next 10 years, while Shell is more reserved in that it expects 25% of new source production to come from deep-water projects. To support their deep-water growth, these major E&P companies along with others have significantly increased their deep-water Capex spending outlook over the next four years.
Over the next four years, it is estimated that global growth in the offshore E&P sector will increase 8 to 10% YOY. Leading the way in E&P spending is Brazil, which is anticipating $250 billion to be spent on the development of its offshore reserves. Second in E&P spending is Norway, which is expecting $220 billion to be spent on the development of the North Sea, Norwegian Sea and the Barents Sea, while the U.S. is expected to spend around $190 billion over the next four years.
All of these developments create significant opportunities for Halliburton.
2. North American Drilling Market / Technological Improvements
As the U.S. is focusing on becoming self-sufficient in energy by 2030, the country is looking at tight oil and shale gas as a one of the main sources for its oil and gas production. According to the EIA the U.S. has plenty of oil and gas reserves. They estimate at current consumption rates, the U.S. alone has around 92 years of technically recoverable natural gas reserves. Technically recoverable reserves consist of "proved reserves" and "unproved resources." As the U.S. has enough oil and gas to sustain itself for many years, this will open the door for many investment opportunities. One sector that will directly benefit from U.S. becoming self-sufficient in energy is the oil and gas service sector.
Halliburton's Frac of the Future is part of an initiative designed to address the current need to shrink well site footprints, improve environmental performance, cut supply chain costs and enhance the reliability of onsite equipment.
An integral part of Halliburton's Frac of the Future is the use and creation of Dynamic Gas Blending. Caterpillar Inc. (CAT), Halliburton Inc. and Apache Energy (APA) have teamed up to create and use Dynamic Gas Blending (DGB) engine technology. According to businesswire.com "the Dynamic Gas Blending kit allows customers to reduce fuel costs and meet changing emissions regulations by utilizing a wide range of gaseous fuels in their existing diesel generator sets. The kit also recently successfully completed an extensive field test for Encana Oil & Gas Inc (ECA)."
As Halliburton's stock price has declined by over 10% in the last couple of weeks, this provides an opportunity to invest in a solid company with many forward catalysts. With Halliburton's strong presence in North America coupled with the growing outlook for offshore deep-water development, it is my opinion this is an excellent time to purchase the stock. In an article I recently published entitled "Halliburton offers 20% upside in 2014" I listed a price target of $62.88 for 2014.