Pumping Services Should Pump up Halliburton
02/12/2018 5:00 am EST
Higher average oil prices in 2018 and robust hedging by US exploration and production companies should provide a supportive environment for pressure-pumping pricing next year. Conditions also look favorable on the supply and demand side, observes Peter Staas, editor of Capitalist Times.
Expected proppant savings should also support pressure-pumping pricing as operators rely more heavily on local silica sand in the Permian Basin, Eagle Ford Shale and the Haynesville Shale.
Despite the profusion of pure-play pressure pumpers, we prefer Halliburton (HAL) for its superior scale, a distinct advantage in a business line where the number of consumables (valves and proppant, for example) make well-oiled logistics a critical component of efficient operations.
Halliburton’s strength in other oilfield service and product categories can also help to limit the number of contractors (and therefore complications) at the wellsite and facilitate cross-selling.
In an environment where oil and gas producers remain focused on unlocking efficiencies and improving well productivity, Halliburton’s scale advantages and superior uptime make it a reliable partner.
At the same time, oil-field service companies themselves aim to attract the highest-quality operators to maximize the utilization rate of their pressure-pumping capacity.
Halliburton’s scale should also enable the company to push the envelope on automation and machine learning—innovations that promise to unlock further productivity gains.
Among the major US oil-field service companies, Halliburton boasts the best leverage to accelerating activity and pricing gains in the North America; in a momentum-driven market, Halliburton should benefit disproportionately from inflows to exchange-traded funds offering one-stop exposure to the industry.
Although Schlumberger (SLB) remains a high-quality operator and is the industry leader in key service categories, its outsized exposure to international markets have helped to make Halliburton the go-to name for generalist portfolio managers seeking exposure to oil-field services.
Halliburton has also taken market share internationally in recent quarters, while investors have questioned Schlumberger’s recent pursuit of production management deals that involve taking an equity interest in upstream projects. With market and business momentum on its side, Halliburton is a buy up to $50.
Although we see fewer near-term upside catalysts for Schlumberger, the company leads the industry in many product lines and has a solid track record of execution and innovation. Ongoing weakness in international markets will remain a challenge, but Schlumberger’s stock looks cheap for patient investors who have a longer time horizon. Schlumberger rates a buy up to $65.