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Halliburton (PowerPoint download)

VIEWS: 47 PAGES: 31

									Halliburton
2012: Year of Transition
Overview
•    Oil Services Sector
•   The Company
•   Valuation
•   Making Sense of the Cycle
•   Managing the Margin Transition
•   Catalysts
•   Investment Thesis
Oil Services Sector
Overcapacity leading up to the Energy bubble of 1980 led to two
decades of underinvestment in energy resources in the U.S.

Long-term secular bull market began in early 2000’s.

Great recession marked ending of first secular phase and
beginning of second secular bull market in domestic energy
development.

1st phase dominated by fracking and horizontal drilling for
natural gas. 2nd phase will employ previously pioneered
technology for the more service intensive task of oil extraction.
Oil Services Sector
Oligopoly:

Big Four: Slumberger, Halliburton, Baker Hughes, and Weatherford
account for >75% of services market.

Big Four added to their portfolios and built market share coming out of
the downturn.

At beginning of each cycle, stiff pricing competition compresses
margins before giving way to margin expansion as cycle progresses and
backlog builds.

Slumberger and Halliburton are the higher quality names in the sector.
Baker Hughes is attempting to implement structural reforms.
Oil Services Sector
The Case for a Prolonged Secular Bull Market
 • Every BOE costs more than the last to produce
 • Evident in both U.S. and International production costs
 • Entering 4th year of 2nd phase in the secular bull market
Oil Services Sector

             2007                              Today
• Concentrated portfolios (only   • Balanced portfolios (gas and
  gas): boom-bust cycle             oil): smoother cycle
• Constrained capital halted      • Access to credit markets with
  investment                        record low rates
• Customer mix vulnerable to      • Aligned with larger customers
  fluctuations in commodity         with more stable activity levels
  prices                          • Long-term utilization based
• Pricing agreements without        contracts
  volume commitments
Oil Services Sector
Upstream spending (i.e. exploration & production) is best indicator of
oil services revenue.

Large cap oil services have captured market share this past cycle as
revenues have outgrown upstream spending
Oil Services Sector
North America: Large Cap Oil Service revenue to benefit from
1. Gaining share in oil and liquid emerging resource plays
2. Increasing presence of international oil companies in U.S. that
   strongly prefer a single integrated servicer
3. Gulf of Mexico Recovery (only large caps compete)
Oil Services Sector
International: Large Cap Oil Service
revenue to continue recovery:
1. Brazil to overtake Mexico and Venezuela as
 Latin America’s largest oil producer
2. Egypt never materially affected, while Libya
has returned to 1/3 of former capacity
3. Iraq will likely be the most significant growth
story in coming decade (CAGR>30% production
growth) if infrastructure needs and political
stability can be attained (questionable)
The Company
Halliburton:
2nd by market share in the large-cap oil services space

Offers a full package of integrated services (essential for competing for
international and deep-water projects)
Halliburton
Halliburton
         2011 Revenue           2011 Operating Income



        Middle                          Middle
        East /                          East /
         Asia                            Asia
         17%                             18%
                    North
                   America                        North
  Europe /          48%      Europe /            America
   Africa                     Africa              52%
    21%                        17%

                                    Latin
          Latin
                                   America
         America
                                    13%
          14%
Halliburton
Product Line Growth:
Halliburton
Change in product line market share:
Halliburton
Change in product line market share:
Valuation
Valuation
Projected Revenue Growth*       Projected Operating Margins
70%                             35%

60%
                                30%

50%
                                25%
40%
                                20%
30%

                                15%
20%

10%                             10%

0%                              5%


                                0%
                                      2010         2011        2012             2013

                                        North America        Latin America
                                        Europe/Africa/Asia   Middle East/Asia
           2011   2012   2013           Total
Valuation
Valuation
Why the discount?
• 2012 projected earnings were going to be reduced. No one wants to
  step in front of earnings estimates that are being revised lower. The
  stock (and sector) is currently pricing in a severe earnings/margins
  collapse.

• 1Q12 will see margin compression in N.A. from supply chain
  inefficiencies.

• Association with natural gas. Expect supply chain difficulties in the
  partial transition to oiler fields. HAL will remain with larger clients
  in natural gas fields. Many of these clients have the lowest cost
  production and had hedged forward their production.
Valuation
Why the discount?
• Headline risk from the Macondo incident still weighs on the stock.
  Even though the BP contract indemnifies Halliburton, there's a
  small probability that the company will have to pay anywhere from
  several hundred million to two billion dollars. Halliburton has yet
  to take a contingency charge for the incident (cemented the
  Macondo well).

• Oil Services is a late cyclical play - still no recovery from the 2011
  growth scare. The discount has affected the entire sector.
  Halliburton is not being uniquely punished.
Making Sense of the Cycle
Equity multiples and Large-Cap Oil Servicers’ earnings growth are not
aligned.
 • Equity multiples rise and fall with LEIs, primarily the ISM index
 • Oil Servicers’ earnings growth driven by E&P Spending
 • Sector is trading below normalized P/E multiples, despite similar
    multi-year growth projections as previous cycles
Making Sense of the Cycle
Over-reactions to growth scares are not uncommon. The result is that
Oil Servicers’ stocks are punished heavily, creating excellent buying
opportunities. Conversely, Oil Servicers’ are prone to overshooting on
the upside.

  65                                                                100%
                                                                    80%
  60
                                                                    60%
      55
                                                                    40%
  50                                                                20%
ISM




  45                                                                0%
                                                                    -20%
  40
                                                                    -40%
  35
                                                                    -60%
  30                                                                -80%
    1987        1992         1997            2002      2007
                            ISM Manufacturing Index
Making Sense of the Cycle
Outperformance by Early Cyclicals paves way for later outperformance
by Late-Stage Cyclicals

                                  Early Cyclicals/Late-Stage Cyclicals ratio
180                                                                                                     1.4
160                                                                                                     1.2
140
                                                                                                        1
120
100                                                                                                     0.8   SPY
 80                                                                                                     0.6
 60                                                                                                           Early Cyclicals/Late-Stage
                                                                                                        0.4   Cyclicals
 40
 20                                                                                                     0.2

  0                                                                                                     0
                                                                                                 2012
                                                       2006




                                                                            2009
      1999
             2000


                           2002




                                                2005
                                  2003
                                         2004
                    2001




                                                              2007




                                                                                   2010
                                                                                          2011
                                                                     2008
  Making Sense of the Cycle
  Relationship can also be understood in reverse. Late stage Cyclicals,
  notably energy, lag the market.

                   Late-Stage Cyclicals/Early Cyclicals ratio
180                                                    2.5
160
140                                                    2
120
                                                       1.5
100                                                             SPY
 80
                                                       1
 60                                                             Late-Stage Cyclicals/Early
 40                                                             Cyclicals
                                                       0.5
 20
  0                                                    0
 Making Sense of the Cycle
               Large Cap Oil Services historically lag S&P 500
      180                                               90

      160                                               80

      140                                               70

      120                                               60

      100                                               50   SPY
SPY




      80                                                40   Large Cap Oil Services
                                                             Composite
      60                                                30

      40                                                20

      20                                                10

       0                                                0
       2000   2002   2004   2006   2008   2010   2012
Managing the Margin Transition
Operating Margins have suffered from transitory headwinds:
1. Inefficiencies from relocating the frac fleet from natural gas to
   oilier fields. Began in 4Q11 and will likely continue through 2Q12.
   Mgmt guided N.A. margins down by 100 bp for early 2012.*
2. Idled capacity in GoM during the moratorium has punished D&E
   margins and supply chain efficiencies are just beginning to recover.
3. Latin America will drive moderate international margin expansion
   in 2012.
4. HAL kept boots on the ground in Libya, Egypt, and Iraq which
   punished international margins, but capacity is now coming back
   online. Iraq has the best growth potential but the farthest to go.
   This is more likely a late 2012—2013 story.
Managing the Margin Transition
D&E margins are 510bp lower than last cycle’s average. As HAL
rebuilds capacity, GOM margins should begin to provide a tailwind for
earnings in 2012.
Managing the Margin Transition
International margin expansion will likely be driven by Latin America
in 2012 and later in the year by MENA operations.
Catalysts
Turn in investor sentiment. HAL is currently priced at levels not seen
since 2009, i.e. fwd P/E = 8.5x

Further guidance from Mgmt on the 1Q12 conference call. Mgmt has
already emphatically stated that there will not be a collapse in margins
in 2012.*

Rising energy prices creating a shift in the public dialogue that leads to
an increased focus on domestic energy production. Political turmoil in
the Middle East (i.e., Iran) shifts national perception of need for
domestic energy. Of the four big oil servicers, none stand to benefit
more from this shift than HAL.
Catalysts
Bottoming and recovery in natural gas as many firms exit space
stabilizing prices at viable production levels.

Quicker than expected recovery in the Gulf of Mexico. A recovery here
has the potential to pad NA margins in the first quarter.

If all else fails, a continued recovery in the U.S. equity markets could
drag the oil services sector up behind it as the widening valuation gap
grows increasingly apparent.
Investment Thesis
Halliburton is the cheapest house in the best neighborhood. The
company is currently positioning itself in the sweet spot of long-term
secular tailwinds – rising capex intensity, the return of domestic energy
production, etc. However, the stock is currently being priced for the
end of a secular bull market when only a cyclical restructuring is taking
place. In 2012, as operating margins recover in N.A., GoM, MENA, and
continue to expand in Latin America and as investor sentiment shifts,
HAL will stand to benefit from a significant revaluation of its shares.

								
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