Halliburton will surge on its North American business, particularly fracking as the U.S. shale play continues to evolve, analysts at RBC Capital Markets argue. The large oilfield services provider won’t derive much profit from its international operations, but it will see Iraqi production stabilizing and unconventional gas plays develop across the globe, setting it up to benefit in the future.
While exploration and production companies have had a stellar year, with Exxon Mobil and Chevron both showing double-digit percentage gains, oil and gas service providers have substantially underperformed. Halliburton and Schlumberger, the two largest players, are down 18% and 12% for the year, respectively.
But Halliburton’s luck could begin to change. With about 75% of its revenues coming from its North American operations, RBC’s equity analysts believes the company is poised to surge on the expansion of shale plays and hydraulic fracturing, or fracking.
The company’s North American markets will be the main growth driver in 2012, explain the analysts, as E&P companies continue to bet on fracking. Halliburton’s frac fleet is already about 80% contracted at an average duration of 2 years, and all incremental 2012 capacity “is coming on-line under term contract[s]” which E&P companies are extending to secure supply. “This behavior indicates shortages, not pending surpluses,” wrote the analysts.
Margins will remain in the mid-30% range given pressure pumping pricing is holding and the company’s strong supply chain management.
On the international front, the company won’t manage to command pricing power in 2012, as rig count gains of about 10% are unlikely to absorb enough capacity. But the quicker than expected development of unconventional gas plays in places like Argentina, Mexico, Saudi Arabia, and Australia, along with Halliburton’s Iraqi operations coming back to break-even levels should provide some support.
It’s not all rosy with fracking, though, as the practice has stirred the environmentalist waters. Activists have been very vocal against the practice, leading to an EPA investigation. On Thursday, the regulator said it found frac chemicals in a drinking-water aquifer in Wyoming, as Forbes' Chris Helman reported. According to the RBC's analysts:
“Samples taken from two deep water monitoring wells showed synthetic chemicals ‘consistent with gas production and hydraulic fracturing fluid.’ The EPA has concluded that fracking chemicals may have entered the aquifer through "faulty well construction, gaps in impermeable rock, or fractures created during drilling,” explained the analysts. This material could help build the case for tighter rules and regulations regarding fracking in the U.S.
Another important point for investors to keep in mind is the continued court battle between Halliburton and BP in relation to the Macondo Well accident in the Gulf of Mexico. Beyond the “he says, she says” media and legal show, Halliburton’s max settlement range should fall in the $3 to $4 billion range; the company has put aside about $4.5 billion in liquidity, meaning it will be able to digest the settlement.
Halliburton is scheduled to post fourth quarter earnings on January 23. RBC’s analysts see the company earnings 99 cents per share in the fourth quarter, and have upped their 2012 and 2013 EPS estimates to $4.14 and $4.57 on brighter prospects for its North American business. They have slapped an “outperform” rating on the stock and have a $46 price target.