A couple of weeks ago research analysts at JPMorgan Chase & Co. raised their price target of shares of Halliburton Company (NYSE:HAL) from $66.50 to $77.00. The stock is currently trading at $56.90 so JPMorgan Chase & Co.'s target price suggests a handsome upside potential for the company's stock. You can see from the following chart that the company's stock price is up 39.70% since the previous year.
Therefore, I will analyze the factors that will drive the company's stock price in FY 2014 and onwards.
The company is a supplier of services and products to the energy industry to support the exploration, development, and production of oil and natural gas. The company operates through two divisions: the completion and production segment and the drilling and evaluation segment. Therefore, let's begin the article by discussing the outlook of spending in the energy sector.
The company generated 49% of its total revenue from the U.S. in FY 2013 and the remaining portion from rest for the world. Hence I will analyze the global energy sector's spending outlook along with projections for the North America energy sector's spending for the coming year.
Energy Sector Spending Outlook
The Barclays Capital 2014 oil and gas exploration and production (E&P) spending survey projects growth in energy sector spending around the globe. The oil and gas companies around the globe expect E&P spending to rise by 6% worldwide as a result of 7% growth in North America and 6% growth outside of North America. The survey for the outlook is based on the spending intentions of more than 300 oil and gas companies for 2014. The following table shows the forecast of North American E&P capital spending for 2014.
After recording 2 years of barely earnest growth North America is positioned to see a spurt of exploration and production spending in 2014 as US operator will attempt full scale development of unconventional resource plays. The increase in North American spending is expected to come from growth in service-intensive, multi-well horizontal drilling as well as production growth. Barclays stated that many US producers are inactive and holding years, and in some cases decades, worth of drilling inventory. As a result, the bank expects the explorers and producers to cater to the growing inventory of undrilled wells in the estate by allotting additional capital to the US land market.
The highest spending growth is anticipated in the legacy Permian basin that according to the Baker Hughes represented 28% of US land drilling activity in December. Barclays's survey discovered that various big operators such as Apache Corp and Devon Energy Corp are likely to considerably increase Permian basin spending in 2014. This has led Barclays to forecast that the region could record net demand growth for horizontal rigs up to 50-70 units, an approximately 35% increase from 2013's levels.
As a consequence of the development of new energy resources and a rise in complexity for development, the demand for service intensity will enhance further. Additionally, various companies are also switching to multi-well pads that will also trigger strong drilling activities and allow Halliburton company to capitalize on its operational scale and expertise.
A significant portion of the company's completion and production segment delivers hydraulic fracturing services to clients developing shale natural gas and shale oil. Therefore, I will discuss the outlook of the U.S. hydraulic fracturing market in the following paragraphs. The company's completion and production segment drove around 60% of the company's total revenue in FY 2013.
North America and Global Hydraulic Fracturing Market Outlook
North America has a major market share in the global hydraulic fracturing market. Research and development initiatives by the U.S. government and encouraging regulatory conditions have helped the U.S. market to grow to this level.
PacWest Consulting Partners forecasts improvements in conditions in the North American market for hydraulic fracturing services along with the rise in pricing in many regions by early 2015.
The demand for fracturing services in the U.S. land market is anticipated to increase by 5% in 2014 and 3% in 2015. The rise is driven by momentous growth in the number of horizontal wells and fracturing stages that are forecasted to increase to more than 400,000 record stages in the year 2014 reflecting an increase from 375,000 in 2013.
The major drivers behind the growth in the hydraulic fracturing market are the improvement in technology that has resulted in a rise in production rate enhancing recoverable reserves allowing energy strategy shifts to natural gas and energy retreat by domestic supply.
As a result, the fracturing assemblers and component manufacturers reported a rise in new build orders but, the destinations for a majority of those new build orders are for places outside of North America. Therefore, I will also analyze the growth prospects for the company in regions other than North America.
Overall, the global hydraulic fracturing market will grow from $40 billion in 2012 to $64 billion by 2017.
Growth from the International Market
The hydraulic fracturing of shale in search of oil and gas has barely started outside the U.S. but activity is expected to augment in 2014. A record 400 shale wells are likely to be drilled outside of U.S. borders in 2014. China and Russia will lead the majority of the activity according to energy consultants Wood Mackenzie. On the other hand, thousands of shale wells will be drilled in the U.S. in 2014. China has the biggest shale gas reserves valued to be the equivalent of 212 billion barrels of oil. In shale oil Russia leads the list with around 75 billion barrels according to the U.S. Energy Information Administration. Australia, Poland, and Algeria, also have big reserves.
Moreover, the number of rigs used onshore in Europe and the Asia-Pacific region has grown by 10% over the past year with most of those rigs intended for shale according to the data compiled by oil services company Baker Hughes (NYSE:BHI)
The prospects of fracking activity outside the U.S. is reflected in the activities of major oil players such as Royal Dutch Shell (RDS/A) that joined hands with China National Petroleum Corp. in the current year, to explore in Sichuan, the province that has 40% of China's shale reserves. YPF (NYSE:YPF), the Argentine oil company, has teamed up with Chevron (NYSE:CVX) to bring out deposits in Argentina's vast Vaca Muerta formation. According to Edward Morse, head of commodities research at Citigroup (NYSE:C), there should be enormous growth in worldwide drilling, as there was in the U.S., in the next three to five years.
Now let us take a brief look at the expectations for the company's bottom line, cash flows, and return to investors.
Expectations for Bottom Line, Cash Flows, and Returns
Source: Bloomberg Businessweek
The chart above shows the forecasts of the year-over-year rise in the company's profits along with a similar pattern followed by the company's peers.
During FY 2013 the company's net income declined by $1 billion due to the charges associated with the Macondo well blowout. The company is expecting low, double-digit growth in its international business with a 20% margin expansion in 2014. Accordingly, on a consolidated basis, the company has projected it would generate double-digit growth in its EPS for the full year of 2014.
The company has a strong cash generating potential. Despite the negative impact on its income the company's operating cash flow rose by 22% to $4.4 billion by the end of FY 2013.
The company repurchased about $4.4 billion of its stock in FY 2013 reflecting 10% of its outstanding shares in FY 2013. The company also plans to keep reducing its outstanding shares in FY 2014 and had around $1.7 billion of share purchase authorization available under the stock repurchase program by 31 December 2013.
Furthermore, Halliburton Company increased its dividend twice in FY 2013 to 0.15/share and that seems totally safe and in line with the company's ability to generate considerable cash flows. The company plans to uphold a 25% payout ratio based on income for FY 2014. Currently, the company's payout ratio, based on income, is around 21%. The company is anticipating it will record double-digit growth in its income in FY 2014 so a dividend increase can be expected likewise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.