Industry spending to go down
Having discussed Halliburton’s (HAL) growth prospects, we’ll now look at some of the major factors and concerns that may affect Halliburton.
Hydraulic fracturing and horizontal drilling have helped increase US oil production more than 60% since 2010, to ~9 million barrels a day. If that growth is interrupted, energy-sector spending could drop by $40 billion, according to Barclays PLC.
According to Cowen and Company’s annual study, global capital expenditures for oil and gas exploration and production (or E&P) projects are expected to drop 17% to $571 billion in 2015. E&P spending will drop 30%–35% if oil prices average $60 per barrel. In a $55- to $60-per-barrel scenario, spending could decline by as much as 20%.
Rig count will vary by shales since the break-even points are different for each shale. According to the study, drilling in the cores of the Eagle Ford, Permian, and Bakken will be less affected than some of the other shales.
Its model, however, indicates that in the event of a 20% drop in spending, the rig count could decline 550 units from the fourth quarter average. To know more on US energy upstream companies’ capex (capital expenditures) budget reduction, read Market Realist’s series Is a crude oil price trend forcing energy companies to bite the bullet?
Energy price concerns
The recent slump in oil prices has started to affect the oil servicing industry. Since its high in June 2014, the West Texas Intermediate (or WTI) and Brent crude oil prices have gone down by more than 50%. In the past couple of months, the natural gas price in the United States has slumped ~30%. Halliburton (HAL) now anticipates that some of its integrated oil company customers may reduce their technology budget in a cost-cutting effort to improve profitability. This will create pricing pressure on Halliburton.
Baker Hughes (BHI), National Oilwell Varco (NOV), and Schlumberger (SLB) are some of the other companies in this industry that will also lose revenues and profits as energy producers curtail production and rig activities. All these are components of the VanEck Vectors Oil Services ETF (OIH).
Read the following section to know whether Halliburton expects its capex to grow under a weak market condition.