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HAL AT A GLANCE

P/E ► 10.7 AVG EV/EBITDA ► 6.79 AVG ROA ► 10.2% AVG ROE ► 17.6% AVG Debt to Equity ► 1.01 AVG Current Ratio ► 3.82 HIGH Interest Coverage Ratio ► 17.5 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

Halliburton (NYSE: HAL) is a top three provider of support services for early stage energy production with revenues, for the first quarter of 2009, of $3.9B and 2008 total revenues of $18.3B and operating income of $34B.^[1][2] Its primary business is to help oil exploration and drilling companies extract more oil from the ground. To that end, the company acts as a consultant, helps to optimize production. Halliburton also provides equipment and services to aid companies in evaluating new drilling opportunities, as well as cementing services post-drilling.

Halliburton has extensive market coverage in over 70 countries. As a result of its broad international exposure, Halliburton is particularly vulnerable to geopolitical instability. In other words acts of terrorism, regime changes and other disruptive acts can negatively impact Halliburton's businesses. Conversely, the company is still incorporated in the U.S., generating approximately 43% of its revenue from this country in 2008.^[3] This keeps it extremely sensitive to downturns in the US economy as well as changes to US environmental legislation.

Going forward Halliburton is expected to benefit from higher oil prices driven in part by sustained demand from China and India. Higher oil prices translate into more drilling. For instance, deep water drilling, which might normally be considered prohibitively expensive, becomes economically feasible when oil prices are high enough. Additionally, since 70% of the world's oil comes from mature reservoirs, optimizing production to squeeze every last drop of oil out of a well becomes increasingly important over time.

The company also benefited from the spin off of its KBR unit in April of 2007. KBR performed much of the contracting work in Iraq that was the subject of negative publicity and government investigations. In addition to garnering negative press for the company, KBR generated only 5% margins. Haliburton's overall margins are closer to 25%.

[edit] History/Strategy

Halliburton was founded in 1919 and has since become a leader in oilfield services, engineering and construction. The majority of their customer companies are in the oil & gas, industrial, and government markets. Before the recent spin-off of KBR, their engineering and construction segment, Halliburton’s oilfield services segment and KBR attributed equal shares to the revenue of the company. However, KBR accounted for much less then a third of profits. Low profitability was one of the primary reasons Halliburton chose to spin off KBR. Today, the vast majority of Halliburton’s profits and revenues come from oilfield services. Halliburton focuses on profitability with less emphasis on amount of sales, i.e. higher margins (20-32%) and less market share.

Net income for the first quarter of 2009 was $378 million, down 35% as compared to the first quarter of 2008. Revenue was down 3% to $3.9 billion. The fall in income and revenues were primarily attributed to a large decrease in drilling activity in North America, and a decrease in demand for products and services. This decrease led to pricing and volume reductions and a 30% drop in rig count in North America. Operating income in North America itself fell by 53% as compared to the same time in 2008.^[1]

In the first quarter of 2008, Halliburton saw revenues of $4 billion, up 18% year-on-year but down 4% sequentially. Sequential decline was offset by strong growth abroad, especially in Latin America. Operating income declined sequentially by 7%. Revenue and income decreased in Europe/Africa because of storms in the North Sea and contract delays in Africa and Russia.

In the second quarter of 2008, Halliburton's year-on-year income declined by 67%, though revenues increased by 20%; weakness in North American pricing, because of the spring break-up in Canada, and the failed Expro acquisition attempt were responsible for the decline, though international growth helped revenues.^[4]

At the end of 2008 revenues were $18.3 billion, an increase of 20% over 2007 and operating income was $4.0 billion, an increase of 15% over 2007. This reflected an operating margin of 22%. Due to increased efforts to grow non-North America operations, revenues and operating income grew by 22% and 26% respectively. Notably revenue from Latin America increased by 35% to $2.4 billion and revenue and operating income in the Middle East/Asia grew by over 20% as compared to 2007.^[2]

[edit] KBR Spin-off

KBR has received significant negative press in recent months in connection with its US government contracts in Iraq. These contracts cover issues such as the building of roads and the building & operating of bases in Iraq and Kuwait. The following were the impetus for the spinoff:

• KBR had margins below 5%, while the rest of the company was highly profitable with margins approaching 25%.
• Halliburton’s stock prices may have been adversely affected by the controversy surrounding KBR. This controversy includes billing disputes for work in Iraq and the possible non-competitive bidding of the military contracts.
• The market may find it easier to value both Halliburton and KBR as separate entities because they are very different companies with different customers.

Note of interest to social investors: Halliburton and KBR are currently being sued for allegedly covering up the the gang-rape of a now-22 year old female employee in Iraq. ABC News is investigating the story and will be airing it in a 20/20 report.

[edit] Acquisition of Expro

Halliburton Company (HAL), in May 2008, made a $3.4 billion (1.71 billion pounds) cash offer for U.K.-based Expro International Group. urging demand for oil from developing economies such as China and India have pushed oil to record levels over the past year. With oil commanding such a high price, Halliburton and its larger rival Schlumberger Ltd, have profited as oil-rich nations have turned to the oil-services firms for help with excavation and exploration, forgoing the assistance of international oil majors, in hopes of keeping a larger chunk of revenue for state coffers.

At the same time oil demand is skyrocketing, some of the easy-to-reach oil deposits are starting to dry up, forcing the oil majors to experiment with more-challenging and - and much-more costly - deep-sea drilling expeditions. Oil at $135 a barrel can cover the cost of hard-to-reach sites that were previously considered financially unfeasible. Such heavy-hitters as Exxon Mobil (XOM), BP (BP), TotalFinaElf, S.A. (TOT), ChevronTexaco (CVX), CONOCOPHILLIPS (COP), and Royal Dutch Shell (RDS'A), will spend a record $98.7 billion this year on exploration and production, according to Lehman Brothers Fin SA (LEH).

And some of that almost $100 billion in exploration and production fees is bound to end up in Halliburton’s pockets. Expro is a leader in deep-sea oil exploration and the firm’s experience with underwater wells at levels deeper than 1,000 meters (3,281 feet) will be a nice complement to Halliburton’s existing services.

On June 23rd, Halliburton announced that Expro had rejected an increased offer; the independent directors of Expro support a £16.15 per share bid by UK's Umbrellastream instead of the £16.25 per share offer by Halliburton. HAL received a 2-day stay on the Umbrellastream deal to try, and is seeking a 14-day adjournment to allow shareholders to consider the deal.^[5]

[edit] Segments

Halliburton has four main businesses related to oil exploration and production:

• Digital & Consulting Solutions Much of this revenue comes from the overseas energy industry's interest in Halliburton’s exploration software and production information systems. This software is produced under the Landmark label.
• Production Optimization Halliburton's most profitable segment. They provide testing, measurement, and management tools for well production. This segment benefits from increased well drilling and at this time the industry is at capacity, allowing for higher margins to be made.
• Drilling and Formulation Evaluation This segment includes providing equipment and services for initial drillings and for the evaluation of the oil or gas formation being drilled for.
• Fluid Systems This segment provides cementing services for well pipes after the initial drilling.

These businesses are combined into two main segments:

• Completion and Production brought in $8.356 billion in 2007, with operating profits of $2.199 billion^[6]. The segment saw sequential decline in the first quarter of 2008 of 4% in revenues and 7% in operating income. These declines occurred because of declines in North America, the Middle East, and Europe/Africa/CIS, but were offset by Latin American growth.
• Drilling and Evaluation brought in $6.878 billion in 2007, with operating profits of $1.485 billion^[7].

Completion and production was the more profitable segment in 2007, with higher margins and greater revenues.

Source: HAL 2007 Annual Report^[8]

[edit] International Presence

Headquartered in Dubai, Halliburton has operation in over 70 different countries. This high level of international exposure provides some degree of protection from economic downturns in any one country. Halliburton derives approximately 45% of its revenues from the United States, though the majority of future growth is expected to be in international markets. For example, Halliburton's Middle Eastern revenues grew 27% in 2007, with operating income in the region growing 26%. Profitable zones for growth also include the North Sea (deep water oil rigs), China, Saudi Arabia, Egypt, Libya, Columbia, and Argentina.

Many factors, including competition, affect profitability in different geographic areas. The following figure shows how margins differ:

Source: HAL 2007 Annual Report^[9]

[edit] Trends and Forces

[edit] Drilling Activity and Energy Prices

Halliburton's sales numbers highly correlated with world-wide drilling activity numbers.

There are two important reasons why drilling operations increase. The first reason drilling may increase is that the price of oil or natural gas has increased (see trend articles: Rising/Falling Oil Prices, peak oil, and Natural Gas). When the price of the commodity being drilled for increases, more drilling becomes economically feasible. In other words, it becomes worth it to drill in more places, places that previously may have been too difficult or expensive to drill. A good example of this is the Gulf of Mexico market, where drilling has increased recently despite the high costs of deepwater drilling.

Offshore rigs make almost four times as much money as the company's onshore rigs, with dayrates having increased by 50% since 2005. The company is planning on putting 170 news rigs on the market in the next four years. Halliburton is spending heavily on its deepwater segment, with 30% of its offshore expenditures going to bolster its deepwater exploration business.

Many expect oil prices to stay at historically high prices for these reasons:

• Petroleum demand is growing largely driven by China and India
• Recently, OPEC which controls a large percentage of the world's excess supply has committed to limited its own production
• OPEC reports small increases in current and expected future production capacity.

The second reason for increased drilling may be an increase in exploratory drilling. Currently, 70% of oil production comes from mature wells, implying that companies need to be looking for new areas.

Drilling activity can be adversely affected by a number of factors, including terrorist activities and geopolitical strife, though the most prevalent reason for decreased drilling activity in any period is seasonal weather patterns. In the Gulf of Mexico, for example, the hurricane season tends to bring down third-quarter production, as seen in the $12 million decline in 3Q07 Gulf activities.

[edit] Shift to Natural Gas

See a more complete description of why natural gas usage trends may change here: Natural Gas

Natural gas is widely available but prices have continued to make the economic feasibility of producing it questionable. It is expensive to get to market because it either has to be moved through pipes or turned into liquid (LNG) through an expensive process. Natural gas is also known for its price volatility. Supply can be disrupted by extreme weather such as hurricanes.

Source: Energy Information Administration

Halliburton is in a good position to take advantage of any increase in natural gas usage because they have a large proportion of pressure pumping market-share. Their sales account for around 32% of the market in pressure pumping. Pressure pumping is a more effecient way to extract natural gas then conventional methods.

[edit] Geo-Political Factors

For a complete description of how geo-political issues affect companies see: Oil's Nationalization & Geo-Political Turbulence

The downside to Halliburton's international exposure is the fact that much of its operations take place in areas with unresolved political conflicts. These conflicts can generate costs to Halliburton in the form of unforeseen operation costs, unexpected operating hurdles and dangers for employees. Acts of terrorism and costs of employee protection are examples. Currently, the instability in the Middle East (including the war in Iraq), conflicts in Nigeria and Venezuela political issues all fall in this category.

[edit] US Election 2008

For a complete description of how the 2008 presidential election will affect U.S. based companies see: Election 2008 -- Democratic victory and Election 2008 -- Republican victory

The result of the election will have an affect on Halliburton's business for a couple reasons:

• A Democratic victory is likely to be followed by stricter environmental laws. As energy companies have to endure more costs, there will be less drilling activity, adversely affecting sales. Halliburton's production optimization segment may see some increase in sales from energy companies attempting to improve the efficiency of current rigs/wells because new rigs/wells may be too expensive or impossible to put in. Also, Halliburton's operations may directly incur costs associated with new regulations.
• Newly elected officials, including the President, will make important choices that affect the countries that Halliburton works in. This will be extremely important regarding countries that have unresolved political conflicts.
• A Democratic victory may be followed by an initiative for the U.S. to more actively pursue alternative energy sources such as ethanol. Halliburton may have to make significant changes to its business to keep up as a strong competitor in the up-stream (first stages of production) energy industry.

[edit] Environmental Regulation

Halliburton and its peers are subject to intense environmental regulation, in regards to contamination of the environment and, increasingly, climate change. Environmental regulations lead to cost increases, as the company is often fined for not following regulatory procedure. As an example, in 3Q07, revenue grew 5% from the quarter before, but operating income only increased 2% due to $32 million worth of environmental charges. Some of the US laws and regulations affecting the company are as follows:

• The Comprehensive Environmental Response, Compensation, and Liability Act
• The Resources Conservation and Recovery Act
• The Clean Air Act
• The Federal Water Pollution Control Act
• The Toxic Substances Control Act

Furthermore, government support for renewable energy initiatives has the potential to reduce demand for oil and gas, leading to less business for the fossil-fuel-based company.

[edit] Competition

Baker Hughes(NYSE:BHI) and Schlumberger Limited (NYSE:SLB) are Halliburton's main competitors, though the recent merger of GlobalSantaFe and Transocean has created the second-largest deepwater drilling company in the world, providing major new competition for the company.

• Schlumberger has recently been focusing on expansion and innovative technologies in the Eastern Hemisphere. This is in reaction to the trend of increased oil field activity in that geographic region. Halliburton has some exposure to the Eastern Hemisphere but North American natural gas activity is still their mainstay. If natural gas prices stay at low levels, Halliburton plans to emphasis expansion in the Eastern Hemisphere and will be more directly competing with Schlumberger.
• Baker Hughes has continued to locate research centers strategically around the world. These centers, due to their close proximity to customers, provide excellent customer service. Baker Hughes's superior customer service may become more important, in a competitive sense, as new technologies are introduced.

[edit] Notes

1. ↑ ^{1.0 1.1} Halliburton 1Q 2009 Earnings Release
2. ↑ ^{2.0 2.1} Halliburton 2008 10k Pg. 13
3. ↑ Halliburton 2008 10k Pg. 3
4. ↑ MarketWatch: "Halliburton net falls 67% after KBR spin-off"
5. ↑ FT: "UK court delays Expro sale to Umbrellastream"
6. ↑ HAL Fourth Quarter and FY 2007 News Release, http://www.marketwatch.com/news/story/story.aspx?guid=B5F28B5C529D4541BD8584DB6354AFC0&siteid=nbs
7. ↑ HAL Fourth Quarter and FY 2007 News Release, http://www.marketwatch.com/news/story/story.aspx?guid=B5F28B5C529D4541BD8584DB6354AFC0&siteid=nbs
8. ↑ HAL 2007 10-K, Page 61
9. ↑ HAL 2007 10-K, Page 21
10. ↑ Morningstar: SLB Financial Statements
11. ↑ Morningstar: HAL Financial Statements
12. ↑ Morningstar: BHI Financial Statements
13. ↑ Morningstar: Financial Statements for RIG