Halliburton (NYSE: HAL) is the world's second largest oilfield services company that operates in numerous oil fields around the world. It provides technology and other critical services to companies to increase their ability to extract oil. Halliburton has recently had a difficult time as a result of the oil downturn along with a $3.5 billion breakup fee it had to pay when its merger with Baker Hughes (NYSE:BHI) ended. However, given its technical strength and the increasing technological nature of oil extraction, I believe the company has strong potential going forward.
Halliburton is an American multinational corporation and one of the world's largest oilfield services with operations in more than 80 countries. It has hundreds of subsidiaries and divisions worldwide and employs an astounding 50 thousand people. The company has dual headquarters, with one in the west oilfield capital of Houston and another headquarter in Dubai, centered around serving eastern oil economies.
(Source: Halliburton Pump - Net DNA CDN)
Halliburton has had an incredibly difficult time since the start of the market crash as an oilfield service provider. Its stock price peaked in mid-2014 at just over $73 per share. From that point, the stock price dropped rapidly to a February 2016 low of less than $30 per share. Since then, Halliburton paid Baker Hughes a $3.5 billion breakup fee, and it has since recovered to present prices of just under $55 per share.
Despite this recovery, Halliburton has enormous potential with the increasingly technical nature of the oil environment. As we will see, it is a strong investment at the present time as the world's second largest oilfield services company.
Now that we have an overview of Halliburton, including its recent stock price performance and how the company will benefit from the increasingly technical nature of the oil environment, it is now time to discuss Halliburton as a company.
It was founded in 1919 and has since grown to a company with a market cap of just under $50 billion and approximately 50 thousand employees from 140 nationalities. The company has a total of 16 research centers and operates in 70 different countries. As we can see, Halliburton has a strong international presence with the assets to take advantage of the growing oilfield services markets.
(Source: Halliburton Technological Overview - Halliburton Investor Presentation)
Now that we have an overview of the company's portfolio, it is time to continue with its products and services portfolio. Halliburton has a well spread-out portfolio with technological assets in all steps of the oil markets. This will enable it to offer companies a step-by-step service option, an option that will enable Halliburton to earn revenue every step of the oilfields' development.
Global Market Opportunity
Now that we have discussed Halliburton overall, it is time to discuss the global market opportunity available to the company in the future.
(Source: Halliburton Market Opportunity - Halliburton Investor Presentation)
Halliburton sees its three largest markets for future growth as unconventionals, mature fields, and deepwater assets.
Unconventional oil is defined as oil extracted through "non-conventional" means. Conventional oil fields such as the Ghawar Field in Saudi Arabia, which produces 5% of the world's oil production, are running out. This increased scarcity of conventional oil means companies and governments are turning increasingly to technologically intense unconventional oil. With its lowest cost per barrel, the use of technology here will increase earnings for oilfield service companies.
Mature fields are those like the Ghawar Field in Saudi Arabia that we discussed above. Basically, they have been producing large amounts of oil for a long time. However, with the current lows in the oil markets, companies are interested in increasing extraction from mature fields rather than trying to discover new fields. Maximizing recovery from these fields requires intense technology.
Lastly, there is deepwater oil exploration. These oil fields effectively include any oil that comes from the more than 50% of the world's area covered by oceans not near a landmass. Given that the majority of the world's easy oil onshore has run out, companies are increasingly turning to deepwater exploration to find the next major oil fields. However, deepwater drilling requires immense amounts of technology, and as the Deepwater Horizon spill showed, any mistake can result in disaster.
This overview shows how the three major sources of future oil market growth all require massive amounts of technology. This will support Halliburton's future growth.
(Source: Market Assets - Halliburton Investor Presentation)
This image of the world shows the potential size of the market that Halliburton has to address. Currently, the world is consuming 33 billion barrels of oil annually - oil that will need to be found from somewhere. On top of this, the world is also consuming 122 trillion cubic feet of natural gas on an annual basis. All these reserves will need to be replaced on an annual basis.
The above map shows the scale of the reserves from these major unconventional sources. Developing these kinds of shale reserves will require massive amounts of technology and shows the enormous future market potential for Halliburton.
The Halliburton Advantage
Now that we have discussed the global market opportunity, it is time to discuss the Halliburton advantage and how this advantage, combined with the increasingly technical nature of future oil extraction we saw above, will provide the company with strong potential going forward.
(Source: Halliburton Offering - Halliburton Investor Presentation)
Halliburton provides companies with a centralized model for oilfield development. This comes through increased optimization and efficiency, along with technology to maximize extraction. Once this oil is found, Halliburton focuses on maximizing the efficiency of extracting this oil and getting it to market. These are all things that help in customers' costs per barrel declining and make them more likely to use Halliburton as their oilfield manager.
(Source: Halliburton Frac of the Future - Halliburton Investor Presentation)
Putting these components in numbers, the company offers the Frac of the Future, or a network of products and technological systems that will increase customers' earnings. Namely, Halliburton allows companies to undertake exploration with 20% less capital and 35% less personnel, while completing wells in 40% less time. These are all numbers that are crucial to shale operators.
American E&P companies are, right now, starved for both cash and time. Maybe more so on the cash side, depending on the company, but still starved heavily on both fronts. Customers, and namely their investors, are looking to increase production and earnings quickly, while having to deploy minimal capital. These numbers are very real to investors. And they make Halliburton an amazing choice for customers.
Thus, we can see how the company provides a significant advantage for its shareholders.
Now that we have discussed Halliburton overall, along with the impressive global market opportunity and the advantage offered by the company to potential customers, it's now time to finish up by discussing its financials.
(Source: Halliburton vs. Peers Total Revenue - Halliburton Investor Presentation)
Halliburton, along with its peer group, has seen its total revenue take an impressive hit from the start of the crash. On a normalized basis, it has dropped to roughly 80% of its 1Q 2011 revenue, i.e., revenue that was still recovering from the 2008 crash. Compared to the company's 2014 revenue, Halliburton is at roughly 50% of where it was before the crash.
Despite these difficulties, Halliburton has managed to achieve impressive returns on average capital employed. The company's 2016 return of 3%, while abysmal, is 50% above that of its peer group. Consistently over the past five years, Halliburton has consistently surpassed its peer group in average returns. This shows the strength of its market position.
(Source: Halliburton North American and International Revenue vs. Peers - Halliburton Investor Presentation)
In terms of North American and International revenue, the hit has been similarly difficult. However, there are two important things to be noted. North American revenue dropped rapidly; however, it bottomed in mid-2015 and has since stayed fairly average. International revenue is continuing to drop; however, it has been rising incredibly rapidly since 2011. This shows that it appears the worst damage is behind Halliburton.
As a result, we can see that the company's financials have taken a hit, but it continues to remain strong and has outperformed its peer group.
Halliburton is the world's second largest oilfield services company, with dual headquarters and a market cap of approximately $50 billion. The company took a severe hit when it was forced to pay Baker Hughes a $3.5 billion breakup fee. Despite these difficulties, Halliburton has huge potential nestled in both the growing oilfield services environment and its offerings to customers.
Traditional, conventional, easy-to-access oil is running out. And as a result, companies are turning increasingly to unconventional, deepwater, and other sources of oil that are harder to get at. Sources of oil that require technology. Halliburton, through its Frac of the Future system, offers an integrated solution to get at this oil, and this has allowed the company to stay financially ahead of its peer group.
As a result of the recovering oil environment, along with Halliburton's impressive technology, I believe the stock is a strong investment at the present time.
Disclosure: I am/we are long HAL, BHI.
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.