Halliburton Will Cash In On Increasing Horizontal Rig Count

Aug.18.14 | About: Halliburton Company (HAL)

Summary

The horizontal rig count has been increasing for eight consecutive weeks.

HAL has the most to gain from the increase in horizontal rigs owing to its expertise in unconventional energy and its technology repertoire.

With the company incorporating environment friendly technology, there’s an aura of productivity and reliability surrounding HAL.

The U.S. has witnessed a constant increase in drilling activity over the past year or so. A lot of this is owing to the oil and gas companies' enhanced upstream capital spending and oil prices' positive outlook despite the global political crises.

By the end of week before last, August 8 to be precise, the rotator rig count in the country increased to 1,908 rigs according to Baker Hughes data. This showcased a 7% year-over-year increase. Vertical rigs increased from the last week's count of 373 to 378 this week, highlighting the second consecutive week where vertical rigs had showcased an increase.

Escalating horizontal rig count

The vanguard of this growth in the rig count was the augmentation in horizontal rigs which rose to 1,317, showcasing an increase of 19 rigs from the previous week. This in turn highlighted a 23% year-over-year increase.

Incidentally the 1,298 rigs recorded on August 1 had a record number of horizontal rigs. The record was broken on Friday, in what was the eighth consecutive week where horizontal rigs manifested an increase.

One company that is set to capitalize from this data is Halliburton (NYSE: HAL), considering the fact that horizontal rig count highlights the demand of well services that are unconventional. An example of this is hydraulic fracturing which is HAL's specialty. And with the precipitously rising horizontal rig count, expect the demand of fracking to escalate.

Horizontal wells

When a well is drilled vertically, the drilling is done straight down to the formation point. A horizontal well, meanwhile, is a directional well where the well isn't perpendicularly on top of the targeted reservoir. If there is an inclination of more than 80 degrees from the vertical, or if the well's lower section runs along the reservoir, the well is called a horizontal well. These wells are drilled for the purpose of augmenting the well's length that is exposed to the reservoir. This in turn helps enhance the production.

The hike in horizontal rig count is owing to discoveries of oil and gas in shale formation. And the quantities involved in the discoveries are absolutely massive. This drilling in tandem with hydraulic fracturing of unconventional formations has resulted in recent oil and gas production in the U.S.

With the pressure pumping markets making a comeback from a 24-month decline, which was orchestrated by a decrease in gas prices and an overkill of equipment supply, the hike in the number of horizontal rigs hints at an increase in pumping demand. HAL, meanwhile, with alternative energies and the latest technology being the vanguards of its recent success and future outlook, looks like a shoo-in to cash in on this recent trend. The fact that around 30% of HAL's revenues are courtesy of pressure pumping further vindicates optimism.

Permian Basin

Permian Basin is the leader in oil rig growth in recent times. The basin is among the most lucrative regions of oil production in the U.S. Even though Permian Basin is still dominated by conventional methods, which are responsible for a large chunk of the basin's oil production, a lot of the wells are now in the mature stage and need procedures that are expensive for production. An example of these procedures is carbon dioxide flooding.

Owing to the expenses involved in mature wells, which have resulted in production declines, operators have been vying to extricate shale oil reserves that have hitherto been considered inaccessible. Horizontal drilling and fracking have been crucial to serve this purpose. And the shift from conventional methods to these new techniques, that need the latest technology, has been rather swift.

According to last week's count, 560 rigs were functioning in the Permian Basin. More than half of them were directed horizontally - 56% to be exact. Conversely, 36 months ago, this percentage was a mere 19%. Moving to the latest, unconventional techniques to extricate oil would yield positive results for whoever operates in the basin. This is because shale flow rates are pretty good from the get go, which in turn ensure that companies augment their returns rather quickly.

With the horizontal rig numbers in the Permian Basin expected to continue rising, the need for unconventional techniques and the latest technology would hike up in synchrony. This would make HAL a key player, with its repertoire of unconventional energy prowess and a wide gamut of technology.

Right up HAL's alley

Growth from unconventional energy segment has been critical in driving HAL northward in the last two years taking the stock from $29 to around $67 as of Thursday. Permian, along with Marcellus and DH basins have collectively propelled HAL's production and revenues.

As far as revenue generated from rig services is concerned, HAL has managed to increase it from $17.97 billion in 2010 to $31.94 billion as things stand. This number is expected to reach around the $42 billion mark by 2017, and is predicted to be as high as $57 billion by the year 2021. And of the total revenue generated through rig services, North American operations are responsible for around 54.6% of the earnings.

HAL's revenue per rig is estimated to be around $7.63 million for the ongoing calendar year. By the year 2017 this number is expected to touch $9.70 million. Similarly HAL's annual average rig count for 2014 is predicted to be 218,000, with the number expected to increase to 234,000 by the end of the year 2017.

The rising rig count - especially through horizontal wells - is expected to result in significantly higher revenues as elaborated by the rising revenue per rig. This in turn would increase HAL's free cash flow through rig services to around $4.26 billion from the current $3.04 billion. These numbers reward investors as much as they would be beneficial for the company. And now with the company incorporating environment friendly technology, there's an aura of productivity and reliability surrounding HAL.

With the oil prices seemingly secure, an imminent hike in horizontal oil rigs and the capital appreciation and value creation through share buyback and dividends offered by the company, HAL is increasingly looking like a lucrative buy both in the short and long run.

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.