SLB - Halliburton: Long-Term Value In Shale Transformation

2024-04-22 12:56:36 ET

Summary

• Halliburton is one of the largest oil service companies in the world, providing services and equipment for oil and gas exploration and production.
• The company's largest competitors in the oil services market are SLB Inc. and Baker Hughes.
• Halliburton derives a larger share of its revenues from North America compared to its competitors, giving it more leverage to the production of oil and gas from shale fields in the US and Canada.
• Long-term evolution in the shale business and industry M&A benefits Halliburton, but the company faces shorter-term headwinds.
• I'm rating the stock a Hold for now but believe it could see upside to the high $40s into early 2025.

When I start analyzing a company, I always ask myself a series of questions.

Two of the most important are:

Which companies are in the peer group?

What makes this company different or unique from its peers?

It’s useful to understand a company’s peers for several reasons including to assess how the market values companies in a particular industry and what are considered normal earnings or cash flow multiples. In addition, it’s often possible to track trends across multiple companies in the same, or related, industry groups providing useful information for assessing relative growth prospects.

The second question is crucial to understanding the relative performance of different stocks in the same industry group.

Halliburton ( HAL ) is one of the largest diversified oil service companies in the world. HAL is not a producer – the company doesn’t produce and sell oil or gas – rather, it provides crucial services and equipment needed to explore for and produce hydrocarbons.

Put in a different way, when a company like Exxon Mobil ( XOM ) or EOG Resources ( EOG ) spends money – capital spending ((CAPEX)) – on drilling new wells or developing new oil and gas projects, much of that spending represents revenues for the oil services companies.

In HAL’s case, its largest peers – competitors in the oil services market – are SLB Inc. ( SLB ), the company formerly known as Schlumberger, and Baker Hughes ( BKR ). The biggest differentiating factor between HAL and its two largest competitors is that HAL derives a much larger share of its revenues from North America.

Per Bloomberg , HAL derived 45.6% of its 2023 revenues in North America compared to around 20% for SLB and 26% for BKR. That’s crucial in the oil services business because it means HAL has far more leverage to the production of oil and gas from shale fields in the US and Canada than its large-cap peers. Indeed, within North America, HAL’s main competitors are much smaller firms such as ProFrac ( ACDC ).

In this article, I’ll explain why the shale business is in the midst of an historic transformation that’s related to the recent wave of mergers & acquisitions (M&A) activity we’ve seen among producers in the region. I’ll also outline why I believe HAL has a significant competitive advantage over smaller oil service rivals in the region and how that could ultimately drive the stock higher towards my 12-month price target in the upper $40s, a more than 20% premium to the current quote....

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