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Summary

  • Halliburton leads the domestic rebound in oilfield services.
  • Stock is attractively valued.
  • Tightening capacity should aide a rebound in pricing.

With the rebound in domestic oil production, one company is a prime beneficiary in the oilfield services sector. Compared to global oilfield services leader Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) is more focused on North American drilling services and should greatly benefit.

Halliburton will have to compete against more aggressive domestic oilfield service suppliers including the recently announced combination of C&J Energy Services (NYSE:CJES) and the drilling division of Nabors Industries (NYSE:NBR). The new C&J Energy hopes to successfully take market share in the suddenly positive market outlook for North American demand.

With C&J Energy Services busy with closing the deal and integration issues, Halliburton is free to continue enjoying the market leadership.

North American Leader

For the longest time, Schlumberger benefited from a much larger focus outside of North America leading the company to a commanding size difference over Halliburton. Lately though, the domestic turnaround in the oil patch is providing Halliburton with an unexpected advantage even back a few years ago.

For the second quarter, Halliburton generated $4.3 billion of revenue from North America compared to only $3.9 billion for Schlumberger. More importantly Halliburton generated 11% sequential gains in revenue versus only 6% for Schlumberger. The best part for investors wanting a more focused play on the domestic energy rebound, Halliburton generated 53.9% of revenue from North America while Schlumberger only saw 32.2% in that region. The later remains a relatively equal play on the Europe and Middle East regions.

The C&J Energy Services play to purchase the Nabors Industries oil services group should hit the radar of investors wanting a real domestic shale focused play. The combined entity will have revenue of over $3.1 billion that is mostly focused on domestic oilfield services. The numbers still pale in comparison to the scope and resources of Halliburton.

Spare Horsepower Capacity Under 10%

One of the more alarming discoveries on the Halliburton earnings call was the identification that the excess horsepower in the hydraulic fracturing equipment segment is now less than 10%. In fact, the decline in spare capacity has led Halliburton to immediately accelerate additions to the fleet by the fourth quarter and throughout 2015. The lack of spare capacity should help with increased pricing.

This places C&J Energy Services in a prime position with an existing plan to add horsepower expecting the market to turn. In addition, the move to buy the Nabors unit sets the company up for a strong market position within the suddenly hot sector.

Attractive Valuations

While most of the market appears fairly valued, the oilfield services stocks and specifically Halliburton trade at attractive multiples.

HAL PE Ratio (Forward 1y) Chart

HAL PE Ratio (Forward 1y) data by YCharts

Bottom Line

In the global race to supply the increasing demand for oilfield services, Schlumberger is the leader. For investors wanting exposure directly to the domestic rebound, Halliburton is not only the more focused play, but also the cheaper play. At only 12.8x forward earnings, the stock is cheap despite the big rebound this year. Investors should use the recent drop to add to the stock.

Source: Halliburton: North America Advantage