Halliburton (NYSE: HAL) is a top three provider of support services for early stage energy production. 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 to optimize production for customers. 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. 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 49% of its revenue from this country in 2010. This keeps it extremely sensitive to downturns in the U.S. economy as well as changes to U.S. 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%.
Halliburton was founded in 1919 and has since become a leader in oilfield services, engineering and construction. Most of its customer companies are in the oil & gas, industrial, and government markets. Before the recent spin-off of KBR, Halliburton's engineering and construction segment, its oilfield services segment, and KBR attributed equal shares to the revenue of the company. However, KBR accounted for much less than 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 (6.8% in 2009) and lower market share.
Fiscal Year 2010 Summary
In 2010, Halliburton earned revenues of $18 billion, a 22% increase from the previous year, and operating income of $3 billion, a 51% increase from the previous year. These increases were due to higher customer spending during the year, driven by increased drilling activity in North America. Business related to unconventional natural gas and oil basins played a large role in offsetting the negative effects of the moratorium on deep-water drilling in the Gulf of Mexico.
Halliburton has four main businesses related to oil exploration and production:
These businesses are combined into two main segments:
Halliburton's Completion and Production segment provides services such as cementing, production enhancement, and completion tools.
Halliburton's Drilling and Evaluation segment delivers modelling, drilling, and evaluation solutions that allow customers to optimize their well construction activities.
Headquartered in Dubai, Halliburton has operations in over 70 different countries. This high level of international exposure provides some degree of protection from economic downturns in any one country. Its business operations are categorized into four primary geographic regions: North America, Latin America, Europe/Africa/CIS and Middle East/Asia.
KBR has received significant negative press 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:
Possible recriminations from KBR remain even though it has already been spun off, it was still being investigated over an alleged 180 million dollars used to bribe Nigerian officials to get lucrative oil drilling contracts, until February 21, 2010, a joint committee of the Senate determined that the investigation into the bribery be suspended, potentially saving Halliburton from further public demonization.
At the end of October 2009 Halliburton announced its acquisition of Geo-Logic Systems, LLC. Geo-Logic Systems develops software to create complex geologic interpretations and construct geologic models. The addition of Geo-Logic Systems strengthened Halliburton's ability to provide customers with advanced modeling solutions to address difficult exploration and drilling projects.
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. In July of 2008 after the court case by Halliburton was denied, Umbrellastream Limited completed the acquisition of Expro for £16.15 per share.
Halliburton's revenue is highly correlated with world-wide drilling activity, which is demonstrated by numbers of utilized rigs.
There are two important drivers of drilling operations. The first is that drilling activity will increase as commodity prices rise (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 in 2008, where drilling increased despite the high costs of deepwater drilling.  As U.S. prices reached historic highs of $146 per barrel in the middle of July 2008, so did the U.S. rig count, moving over 2000 active rigs. Similarly, when oil dropped due to slowing demand, so did rig counts. In October 2009 oil prices were just over $70 per barrel down over 50% since July 2008; following this drop in oil prices, rig counts fell by 47% to 1,040.
The second driver for drilling is the need to locate new reserves. Demand for worldwide oil continues to rise, fueled by rapidly developing countries such as China and India. Currently, 70% of oil production comes from mature wells and to continue to meet demand, exploratory drilling must be increased. The necessity of exploratory drilling will continue to drive the need for more rigs.
See a more complete description of why natural gas usage trends may change here: Natural Gas
During the week of July 14th 2008, it was revealed that natural gas inventories had gained 104 Bcf; on July 17th, shares of natural gas producers fell as investors made a run on the gas market. Later, in September 2008, a report by the IEA predicted natural gas imports will reach about half of world demand by 2015; though the OECD North America will still produce 90% of its own natural gas, imports will double. Because of the 2008 Financial Crisis, however, natural gas demand has been falling since the summer of 2008. In September, demand for natural gas declined by 2.62%, according to the EIA. As excess supply in North America can't be cheaply shipped to other countries, falling domestic demand has translated into rapidly falling prices and reductions in gas drilling. Data from July 2009 shows that the number of drills operating in the U.S. is down by 55%, or 851 rigs, year on year. This reduction in production, however, should help bring prices back up rapidly once demand starts to increase, as there will be a lag between the time demand starts to rise and the time enough rigs are in place for supply to catch up.
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 efficient way to extract natural gas then conventional methods.
As part of a larger trend towards natural gas exploration, Halliburton has entered into an agreement with Realm International Energy to evaluate shale deposits for oil and natural gas production. Shale deposits are already a proven and significant resource in North America, but have yet to reach that status around the globe. Initially, the tandem will target Europe, and they have already identified 8 shale deposits in seven European countries where they are aggressively pursuing petroleum and natural gas leases. As part of the agreement, Realm Energy will use Halliburton's extensive knowledge of shale exploration and practices from North America and apply it to European targets.
In the third quarter of 2009 the number of active natural gas rigs increased by 14, potentially signaling positive movement in the industry. Active rig counts reached a peak of 1,606 rigs in the second half of 2008. In October 2009 rig counts were down to 726, 55 percent lower than peak levels, but steadily rebounding. During the same period inventories hit a record high of 3.66 trillion cubic feet (Tcf).
Over the first half of 2009 companies had scaled back oil and gas drilling operations due to falling commodity prices and restriction on access to credit. This increase in drilling activity is a sign that companies are bringing oil and gas rigs back online and could be a signal of industry stabilization and improvement.
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.
In addition to geo-political turbulence, drilling activity is effected by seasonal weather patterns. In the Gulf of Mexico, for example, the hurricane season tends to bring down third-quarter production, as seen in the $33 million decline in Halliburton 3Q08 Gulf activities.
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. In 2008 accrued environmental liabilities totaled $64 million. Some of the US laws and regulations affecting the company are as follows:
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.
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