Halliburton (HAL), which provides a range of services and products for the exploration, development, and production of oil and natural gas to oil and gas companies worldwide, is a likely long-term value creator. The stock has already been a big value creator and has surged by 138% in the last two years from $29 to current levels of $69. This article discusses why the rally will continue over the next few years.
Growth from the unconventional energy segment will be one of the key growth drivers for Halliburton. The unconventional energy includes shale gas & oil, tight gas & complex gas, coal bed methane and heavy oil.
The growth in unconventional energy and the use of the company’s services in Bakken, Permian Basin, Marcellus Basin and DJ Basin, among others, has been one of the key revenue and stock price drivers for the company. With the use of new technologies and relatively environmental friendly methods, Halliburton has been helping customers quickly bring on line highly productive, reliable wells.
However, growth in the unconventional energy segment has just started for Halliburton and for oil & gas companies. It is estimated that globally there are 6,662tcf of shale gas reserves, 429.4bbo of share oil reserves, and 7,500tcf of coal bed methane reserves and 7,400bcf of tight gas reserves.
As these unconventional energy resources are tapped into, Halliburton will have a key role to play in terms of providing the necessary technology, work-flow and expertise to quickly bring the resources to production.
While the company is benefitting from the unconventional energy growth in the United States, Halliburton has also made inroads into other big unconventional energy markets. I believe that these markets will be the key growth drivers for the company going forward.
In July 2014, Halliburton announced that it has signed an agreement with the SPT Energy Group Inc. to establish a joint venture company focused on hydraulic fracturing and production enhancement services in Xinjiang, China.
The new company, Xinjiang HDTD Oilfield Services Co. Ltd., will provide fracture stimulation services, including design and analysis, data acquisition, and pumping and chemical services in the Xinjiang Uygur Autonomous Region.
With the unconventional energy market yet to take-off in China, Halliburton has made the right move with this joint venture. The JV expects big opportunities in unconventional energy over the next decade in China. This will keep the company’s growth robust and the stock will move higher accordingly.
In February 2014, Halliburton has also made some initial inroads in the Russian market, another big prospect in the unconventional energy space. Halliburton signed an agreement with Gubkin Russian State University of Oil and Gas for the development of unconventional resources in Russia, including the Bazhenov shale. Russia is estimated to have nearly 680tcf of unconventional resources and this partnership is the first step towards growth from harnessing these resources.
Another high growth segment, where the company has provided services, is the deep water oil & gas segment. While the deep water services industry has growth at a strong CAGR of 13% from 2010-13, Halliburton’s growth in the segment has been far robust at 31% during the same period. This is indicative of the fact that Halliburton has attracted more clients for its infrastructure and technological edge over peers.
Even for 2013-2018, the deep water market is expected to grow at a CAGR of 11%. Going by the company’s record, Halliburton’s growth in the segment is likely to be in the range of 20% to 25%. Therefore, this is another strong growth avenue for the company.
Other than exploiting new resources, the next few years will also be critical for oil & gas companies in terms of mature fields and the strategy to boost declining production from the fields. This is where Halliburton stands to gain. As of 2013, 81.2% of Statoil’s (STO) fields were on a decline in terms of production.
The numbers are high even for Total (TOT) and Chevron (CVX) with 71.5% and 67.5% of the fields on a decline. These are just few names, but the mature fields are present across the industry and these companies would need Halliburton’s technology to boost production from mature fields.
All these factors combine to make Halliburton an attractive long-term investment. The company will continue to do well as long as oil prices remain high and global demand for energy sustains. I believe that oil prices will remain high with geo-political tensions globally.
From a shareholder’s returns perspective, Halliburton promises capital appreciation as well as value creation through share buyback and dividends. During the period 2010-2013, Halliburton used 19% of its cash for shareholder return. The company intends to increase this to 35% of cash over the next few years. The implication is higher dividends and more share repurchases to boost the earnings.
These factors convince me that Halliburton is an excellent investment for the long-term. The company currently offers a dividend of $0.6 and a dividend yield of 0.9%. I believe even this will increase significantly over the next few years giving more reasons for investors to cheer.