Why You Should Buy Halliburton

| About: Halliburton Company (HAL)
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Oil and gas producing companies are searching for methods to increase productivity of wells located in the U.S. The increasing productivity has instigated the development of a myriad of technologies for well drilling and created opportunities for oilfield services companies. Halliburton (HAL), a company providing oilfield services, has been investing in the development of engineering products and services that would enhance the understanding of complex wells and maximizes the oil and gas productivity from reservoirs. These technologies are increasingly employed in complex shale and tight reservoirs like the one located in the Niobrara basin.

De-CYPHERing the oil reservoirs efficiently

In September this year, Halliburton launched software CYPHER, which is a Seismic-to-Stimulation service to increase the productivity of oil and natural gas reservoirs. A Seismic-to-Stimulation service is used to create models of reservoirs for the understanding, prediction of, and extraction from the reservoir with collaboration across multiple functions like geoscience, reservoir drilling and well completion. Halliburton's third quarter revenue from North America declined by 1.5% year over year. This decline was due to the oversupply of pressure pumping equipment in the region. While there is a pumping equipment oversupply, it is beneficial for the company to focus on other segments like well drilling services.

The CYPHER service is typically used for shale and tight reservoirs, where the reservoir characteristics vary at different locations. Reservoir characteristics are measured primarily by two parameters, porosity and permeability. Porosity is the ability of a formation to hold oil and natural gas, which means the more porous a rock structure, the better its ability to hold oil and natural gas. The other parameter, permeability, measures how easily the oil and natural gas can flow through the rocks. The greater the permeability the easier it is to extract oil and natural gas. In shale and tight reservoirs, both porosity and permeability are generally low. According to the estimates of EIA this year, the amount of shale gas technically recoverable is 7,299 trillion cubic feet, or tcf, and that for shale/tight oil is around 345 billion barrels, or bbl, within the U.S. We expect the demand for the CYPHER service to remain sustainable over the coming quarters.

The CYPHER service works through the development of the Integrated Asset Model. This model works by incorporating previous databases on rock formation and new information received while drilling into a single model. Halliburton's operations in multiple locations in the U.S. will provide a huge database of the various shale and tight reservoirs. By constantly upgrading the Integrated Asset Model with new information, the service is able to create a dynamic model of the reservoir. This increases the understanding of the reservoir characteristics and increases the productivity of the reservoir by identifying the "sweet spots." Sweet spots are the most productive areas within a reservoir. Besides identifying these sweet spots, the service also aims to connect these sweet spots with the help of a single wellbore. CYPHER helps reduce the need for multiple wellbores to access multiple sweet spots. Data from a sample of 26 wells located in North Texas showed an increase in the production of wells by 67% due to the CYPHER service.

Increasing productivity of shale and tight reservoirs is gaining momentum as oil companies focus on reducing the cost of well operations. A major competitor of Halliburton in the oilfield services is Schlumberger (SLB). In September this year, Schlumberger launched Microscope HD service. This service enables oil operators to take high definition images of the subsurface rock formations around the wellbore to help model the rock formations. This will help identify positions for effective fracturing to maximize oil output from the reservoirs. This service has been employed in 45 drilling jobs across various regions around the world and has been successful in taking high quality pictures of the rock formations.

Gaining Strength in the Colorado

Halliburton has a major presence in the Niobrara basin, which is located in northeastern Colorado. As of September this year, Halliburton has participated in the stimulation of around 95% of the wells drilled and completed in the region, which resulted in a productivity increase of those wells. According to oilfield services firm Baker Hughes, the number of wells in the Niobrara basin is around 278 as of the end of the third quarter of this year. Additionally, the number of well drilling permits in the Niobrara formation as of August of this year was 1,201, which exceeded last year's well permits of 1,190. The number of well drilling permits given shows that there is significant growth for oil field services companies. Major exploration companies like Noble Energy (NBL) plan to spend around $10 billion in the Niobrara formation over the next five years, while Anadarko has earmarked a total spend of $280 million for this year.

Noble Energy has a net acerage of 640,000 in the Denver-Julesburg, or DJ, basin, which is a part of the Niobrara formation. The company plans to drill around 300 wells in the region and increase its production to around 260,000 barrel of oil equivalent per day, or boepd, by the end of this year. With its huge capital spending, Noble Energy plans to increase production from the region to around 540,000 boepd and reach an annual well drilling rate of 500 by 2017. During the third quarter ending in September this year, the production from the DJ basin averaged 97 million barrels of oil equivalent per day, or mboepd, which is a 31% increase over the production of the third quarter last year.

In addition to Halliburton's leading position in the Niobrara formation, the CYPHER service will provide an added advantage to the company. Since the company has been involved in 95% of the well drilling process, it has developed a huge database in the region when compared to its competitors in the oil service industry. This will thus enable Halliburton to implement its CYPHER services effectively.

Though Halliburton has a major advantage in terms of oilfield services competition in the Niobrara formation, it will face operational difficulties in the short term because of floods in the Colorado area. This could increase the cost for the coming quarter. This loss in efficiency is due to road and communication damage. Oil and gas companies operating in the region shut down operations on 1,900 wells during the flood during mid-September of this year. Halliburton expects that normal operations will resume by the end of this year.

U.S. onshore revenues can gain momentum

Halliburton currently trades at a P/E of 24.50 while the forward P/E is around 12.74. We believe the valuation looks attractive because of the growth potential that the company has from U.S. onshore oil and natural gas exploration and production. With the CYPHER service, the company will be able to offer a better service to oil and gas producing companies. Halliburton's leading position in the Niobrara formation gives the company a head start over other oilfield services companies. We believe that Halliburton has been able to secure a position in the onshore oil and gas exploration market in order to generate significant growth in the coming quarters.

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

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.