More than Just Lines on a Map: Best Practices for U.S Bike Routes
2011-10-24_HAL North American Risks Build - D. Gacicia
1. Darren Gacicia
203.276.5664
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1
Halliburton (HAL)
North American Risks Build - Downgrading HAL to Hold
Downgrading HAL to Hold & lowering price target to $52 from $60. We are
lowering our rating and price target for HAL, as risk to consensus 2012 North
America/pressure pumping estimates and headline risk from a Foreign Corrupt
Practices Act (FCPA) investigation create an overhang in HAL shares, which will lead
it to underperform peer oil services stocks. Although HAL will participate in OSX
rallies, HAL needs negative revisions to bring down North American expectations and
shift investor focus to its upside from international and offshore operations, before
HAL shares can outperform.
Risk to estimates remains to the downside. Our 2012 estimate of $3.71, down
further from our revision to $3.94 from $5.00 earlier in October, remains well below
consensus of $4.07. Our original negative revision factored the coming balance of
supply/demand in the pressure pumping market, set to erode the ~20% pricing power
achieved between 2009 and 2011. Our incremental negative revision reflects both
margin compression from higher costs that HAL may not pass through in the short
term and faster than expected degradation of the North American pressure pumping
business. Our 2012 estimate assumes support for North American margins from a
recovery of activity in the Gulf of Mexico, but we can see downside risks to our
estimates if pressure pumping margins decline more quickly than expected, lower
North American rig counts put pressure on volumes, or Gulf of Mexico activity
provides less of a buffer. In a punitive North American scenario, we see downside
risk to our 2012 estimate to ~$3.00. Further potential for negative revisions exists if
startup costs for the 30+ new projects in international markets drag on margins.
Different from 2008, but pressure pumping cycle looks the same. Although we
concede that the upward shift in the horsepower demand curve from the rise of
unconventional oil and natural gas plays does make this cycle different from the last,
we see the arrival of many traditional signs that frothy pressure pumping economics
are set to decline. Most notably, we highlight the wave of new horsepower
construction, reports of flattening pricing in 3Q11 (SLB), reports of oversupplied
regional markets (HAL), admissions that small, private operators may slow spending
amid economic uncertainty (HAL), pressure pumping IPO pipeline suggesting
downside from low barriers to entry (C&J), industry players selling out (CPX, RES),
investors selling stakes (DLJ/BAS).Although supported by utilization-centric contracts
with large, stable operators and greater leverage to oil, we cannot see HAL’s
pressure pumping business escaping an impending downturn. Please see our report,
North American Risks Lead Our Forecasts Lower (10/9/11) for details on our negative
supply/demand outlook for pressure pumping and risks to North American estimates.
Report of potential FCPA investigation for Angola activity adds an overhang.
Details remain limited, but Friday’s reports of an investigation into FCPA violations in
Angola will put an overhang on HAL shares. Given BHI’s previous and WFT’s current
negative experience with FCPA investigations, the announcement will lead investors
to discount the risk of fines or potential for a regulatory monitor for HAL’s activity.
Read through to BHI, NBR, & PTEN. Weaker North American pressure pumping
also poses a risk to estimates for BHI, NBR, and PTEN. That said, we remain positive
on BHI and NBR, given leverage to improving international fundaments for both and
upside to a visible ramp in offshore activity for BHI.
October 24, 2011
Darren Gacicia
+1-203-276-5664
dg@verticalresearchpartners.com
4. Darren Gacicia
203.276.5664
______________
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