Unconventional Energy, New Technologies Give Halliburton The Edge

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 |  About: Halliburton Company (HAL)
by: Khuldune Shahid

Summary

Growth in unconventional energy segment has been crucial in driving the stock northwards.

HAL is making inroads into the bigger unconventional energy markets in China and Russia.

Investment in new technologies has allowed HAL to enhance its oil and gas production by more than 70%.

HAL has the edge among its peers in mature field extraction owing to its technological advancement.

The company would soon be offering the best cash flow among its competitors.

Halliburton (NYSE: HAL) is a stock that is known for its long-term value. Over the past 24 months HAL has witnessed a 138% surge, jumping up to the current $69 mark from $29. Unconventional energy sources have been the vanguard of the company's growth over this two-year period, and with the company incorporating new technologies to facilitate both customers and investors, HAL increasingly seems like the stock to back, if you're eying long-term returns.

Unconventional Segment

Unconventional energy segment - tight gas and complex gas, shale gas and oil, heavy oil and coal bed methane - would be pivotal for the company. Growth from the unconventional segment and the use of HAL's services in Permian, Marcellus and DH basins, among other places, has been crucial in driving the stock northwards. Now with the latest technology ensuring environmental friendliness, HAL's customers are experiencing wells that excel both in productivity and reliability.

There are 7,400 bcf of tight gas, 7,500 of coal bed, 6,662 tcf of shale gas and 429.4 bbo of oil reserves in the world according to recent estimates. And as tapping into unconventional sources continues to rise, HAL would continue to have a major role to play with regards to providing the needed technology and expertise to unearth these resources.

Inroads into Bigger Markets

The company has been reaping the rewards of domestic growth in unconventional energy, and is now making inroads into global markets, which would be crucial for the company's growth in the long run. HAL has recently signed an agreement with SPT Energy Group for a joint hydraulic fracturing venture in Xinjiang. Xinjiang HDTD Oilfield Services would deal with fracturing stimulation services. And with China being earmarked as a lucrative zone for unconventional energy in the next 10 years, HAL is making the right moves to ensure robust growth.

Russia is another massive market for the unconventional energy segment with an estimated 680 tcf worth of unconventional resources. And so HAL's partnership with Gubkin Russian State University for unconventional resource development would ensure the company makes the most of Moscow's rich resources, which include the opulent Bazhenov shale.

Deepwater Oil and Gas

The company has been witnessing high growth in the deepwater oil and gas segment as well. HAL has grown at a robust CAGR of 31% between 2010 and 2013, compared to the deep water service industry's average growth of 13% in said period. This vindicates the fact that HAL has managed to attract significantly more customers than its peers, which is owing to the technological edge that it possesses.

The prognosticated CAGR for the deep water market till the year 2018 is around 11%. Considering how HAL has been ruling the roost in this segment, expect at least a growth of around 25%, making deep water a lucrative zone for the company.

Difficult Negotiations

HAL might have settled the criminal charges against the company from last year's Deepwater Horizon spill, but the incident is still in the memory of many. It goes without saying that the company can ill-afford similar incidents as it vies to establish its hegemony over deepwater. Even so, the negotiations pertaining to criminal charges aren't the only thing that the company has had to negotiate of late.

HAL had to negotiate bad weather in the first quarter which affected its performance in North America. Similarly, since a lot of the company's deepwater expeditions are in difficult-to-negotiate areas, and the company is aiming to grow 25% faster than its peers, its performance in deepwater markets is going to be critical. This is where its technology repertoire comes into play to reduce the deepwater risks.

New Technologies

Massive investment in new technologies has allowed HAL to enhance its oil and gas production by more than 70%. This in turn has meant that the company is spending around 11% of its revenue - which happened to be $3.2 billion last year - on capital expenditure and R&D. The company now boosts 'cutting edge' tools, like for instance joysticks that allow customers to drill offshore while sitting in their offices. The most crucial factor, however, has been HAL bolstering both its production and efficiency with regards to domestic onshore shale activity. This is despite the fact that in most cases fracking extracts merely a tenth of the rock's oil.

HAL leads the pack in the use of technologies, and is a 'one-stop shop' in oilfield and logistics services. This has catapulted the company's overall production by around 30%. And now experts see HAL's stock increasing by over 20% in the next 12 months or so, on 20% earnings growth.

The Expansion

Halliburton clearly has Schlumberger in mind, and is banking on technology to make its margins more attractive. If things go according to the HAL script, margins should increase by around five percent in the next 36 months. Operating earnings look set to rise 25% this year, to $3.99 per share, with the revenue growth almost touching double digits, growing to $32 billion.

The expansion has worked wonders for HAL with the company looking to hike up cash flows for the shareholders. The Q1 cash flows for the year 2014 ($954 million) have more than doubled compared to Q1 from 2013. The company has said that it aspires to increase the percentage of available cash for the shareholders by around 35% of the operating cash flow. This would double HAL's historic average and would surpass its peers' numbers as well. And most of this is down to the company upping the ante on technology, which in turn has improved the company's production and efficiency.

Mature Field Strategy

In addition to the exploitation of new resources the near future would be crucial for all oil and gas companies, as they formulate their individual mature field strategies to enhance production. And this is precisely why HAL has the edge among its competitors.

As of last year Statoil's (NYSE:STO) production was on a slide in 81.2% of the company's fields. Even big guns like Total (TO) and Chevron (NYSE:CVX) have witnessed production decline in 71.5% and 67.5% of their fields respectively. With all oilfield big names having mature fields that haven't been unearthed successfully, HAL's technology gives it a clear head start - the chasing pack would have to emulate HAL's tech prowess to boost their production.

Wait on Ukraine

While HAL proves to be a tempting buy, it's best to ride the Ukrainian storm before taking a plunge in the stock. The escalating political tension in the country and the ensuing Russian sanctions have meant that energy stocks have been slipping of late, as Washington continues its political tug of war with Moscow - HAL, along with Noble Crop, slid by more than 2.4 percent on Tuesday.

While Moscow relies on US oil behemoths like Exxon Mobil Corp. (NYSE:XOM), BP Plc (BP/), HAL and Schlumberger Ltd. (NYSE:SLB), the fact of the matter is that these companies rely on Russia as well, as far as their future outlook is concerned. HAL especially might be crucial for Russia, since Moscow can certainly do with the latest technology and expertise to unearth its massive resources. But if the Ukraine crisis lingers on, one might have to rethink investments in the energy sector. Hence, it's best to wait till the Ukraine crisis eases out, and then you can maximize your gains through HAL.

Still a Solid Long-term Investment

With everything said and done, new technologies and unconventional energy sources together make HAL a very tempting long-term investment. The oil prices would remain high as global energy demand escalates, and as the world's political tensions take their toll.

As far as the shareholder's viewpoint is concerned, HAL offers appreciation of capital and creation of value via share buyback and dividends. The company would soon be offering the best cash flow among its peers. If you're looking for a long-term investment, look no further than Halliburton.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.