Halliburton

Halliburton's sales rose nearly 4% year on year to $5.7 billion, led by its drilling and evaluation segment. Higher drilling-related services and wireline activity in certain regions drove sales higher. Sales in that segment drove operating margin to increase 10 basis points to 13.5%.

Why it matters: Results were mixed as drilling sales surprised to the upside, but overall margin came below what we had earmarked due to temporary mix impacts and higher maintenance costs. Still, the long-term news was positive, as Halliburton shared strong wins in several markets, like offshore. We like these wins because it suggests to us that Halliburton is taking share in key markets with more long-term, durable investment, particularly in deepwater like in the Caribbean and the US Gulf. Halliburton alluded to rig tendering that could help its back-half 2027 results. Wins in markets where investment is more durable matter because Halliburton is highly exposed to US shale, which is far more discretionary. We think this factor hurts its multiple relative to its Big Three oilfield services peers. Investors could re-rate Halliburton if these wins continue.

The bottom line: We raise our fair value estimate to $36 from $34 for narrow-moat-rated Halliburton, primarily due to higher sales in our long-term fundamental outlook, including in international offshore. Still, the stock remains firmly in 3-star territory. Customers continue to value Halliburton's ability to engineer solutions that allow producers to maximize the value of their assets, which we think evidences its intangible moat source. Halliburton's successful outcomes across multiple geologies enhance its reputation. Technology advances like fully automated drilling that links geological data directly to a drilling rig's control system should allow it to sell more content per rig. Automation helps customers drill more precise wells or improve recovery, supporting differentiation in a competitive industry.

Our fair value estimate is $36 per share. We value the stock at 12.5 times 2027 adjusted earnings per share and nearly 8 times on a 2027 enterprise value/adjusted EBITDA basis.

While Halliburton is the premier North American oilfield-services firm, we think its smaller offshore international footprint compared with SLB hurts its relative valuation and near-term outlook. Still, we expect revenue will grow at a 2% compound annual rate over the next five years (2025 base year), with incremental and decremental margins that will typically range between the low and mid-30s and a maintainable free cash flow margin of roughly 9%-10% through the cycle.

Oil price-related headwinds will affect Halliburton’s business. US shale is more short-cycled and thus far more susceptible to commodity pricing. Halliburton will likely continue to see near-term declines in its North American business (half of its revenue mix). That said, we suspect Halliburton’s frac spread count is rapidly approaching trough levels. Data from Rystad reveals that it's already at multiyear lows relative to the prior decade (as measured at year-end). The inventory of drilled but uncompleted wells also remains historically low in the US, with a significant portion of them unviable for production. Drilling and completing activity carries far more associated revenue than completing alone, so we expect Halliburton will be well positioned to participate when commodity prices recover.

We like Halliburton’s e-fracking solution in its Zeus platform. We think it will continue to take price as it lowers a customer’s total cost of ownership while reducing emissions. Its iCruise rotary steering technology should also benefit from pricing power, particularly since it’s a new-generation model, which helps producers by improving their penetration rates and decreasing their downtime.

Roughly one-fourth of Halliburton’s business is exposed to offshore projects outside North America. We think the fundamental drivers underpinning long-term offshore project spending outside North America are intact. Industry reports we’ve read suggest final investment decisions or sanctioned project spending could total roughly $100 billion annually over the next two to three years. We expect Halliburton can benefit from complex offshore completions work that is far less competitive and therefore elicits better pricing.

We assign Halliburton a Narrow Morningstar Economic Moat Rating.

Halliburton is the second-largest oilfield-services firm in the world and the largest in North America and leads in any activity from the reservoir to the wellbore. These activities include pressure pumping through techniques like hydraulic fracturing and well completions. Halliburton’s intangibles in the form of intellectual property, engineering prowess, and a decades-long record of performance create pricing power for many of its solutions. Halliburton’s customer relationships are also valuable intangibles. Customers value large integrated services firms’ full suite of services as it allows for both better accountability and promotes reward structures that incentivize collaboration between customer and service provider, creating a valuable feedback loop.

Many of Halliburton’s solutions, such as its drilling capabilities, incorporate its expertise, prior learning, and software to deliver improved performance. Learning from disparate geologies has helped it perfect resource extraction techniques and lower producers’ development costs per barrel of oil equivalent over time, often through reduced downtime or better execution. The value created by these efforts is shared between producers and Halliburton and preserves the firm’s ability to generate excess returns through commodity cycles.

Completion and Production Segment Warrants a Narrow Moat

We divide Halliburton’s completion and production segment into three broad revenue categories: pressure pumping, completions, and other services, which most notably includes Halliburton’s artificial lift and specialty chemical sales. We think Halliburton commands a narrow moat in the first two and has no moat in the third, given its competitive position. Still, we forecast through-the-cycle segment returns on invested capital in the low double digits, akin to historical returns.

Halliburton is the undisputed leader when it comes to hydraulic fracturing, with its share holding steady at roughly 25% of the global market and almost double its closest peer. While portions of the pressure pumping market do strike us as more commoditized and, in turn, subject to more price competition, we don’t think that’s the case for many of the solutions Halliburton sells.

We estimate that over half of Halliburton’s fracking fleet comes from Zeus, its electric fracturing equipment, given customer preference for lower emissions. E-frac uses an electric motor powered by an electrical source, usually a gas turbine, which can power multiple trailers and reduce emissions by up to 45%. Halliburton has priced this product at a premium to the market, given the strong customer demand. We’ve read that it’s potentially up to 20% more expensive than a traditional frac trailer, including ancillary equipment, but that ignores the price of a gas turbine, which is roughly 3 times the cost of a diesel engine. Even so, analysis by Rystad reveals that operators can potentially save millions in fracking operations.

Aside from emissions reduction and the lower cost of operating with gas versus diesel, Zeus’ second-generation technology helps lower a customer’s total cost of ownership. Customers have cited these benefits and significant completion savings.

Halliburton is also the global leader in completion equipment and services, holding market share in the lower 20s that’s steadily increased over time. Halliburton’s completion technology improves per-foot recovery, including in more technically complex international offshore projects, where strong completions are vital to ensuring the economic viability of projects.

Finally, Halliburton layers its software on its fracturing and completion equipment, which creates economies of scope. Embedding software and analytics in multiple pieces of equipment reduces the capitalized cost of its digital investment. It also improves its equipment’s execution. This software provides visibility down the wellbore and provides real-time fracture outcomes, while giving users better control over fracture placement. The data itself is also valuable to Halliburton and its customers, particularly at the subsurface, since it provides better insights into completion performance and a nonintrusive way of obtaining information that would otherwise be unavailable without compromising the well barrier or the drilling program. Operators using SmartFleet have improved the consistency and even distribution of hydraulic fractures by 30%, reduced completion costs by 25%, and improved hydrocarbon production by up to 20%.

We Assign the Drilling and Evaluation Segment a Narrow Moat

Halliburton’s moat is comparably weaker in this segment, but we still forecast low double-digit, through-the-cycle returns on capital. For our moat analysis, we break this segment down into drilling and completion fluids, wireline services, directional drilling services, and other.

Of these, drilling and completion fluids is the only business line that matches Halliburton's competitive position in pressure pumping and completions. Aside from cementing and completion, Halliburton’s largest international business lines include drilling fluids, which collectively represent over 60% of a well’s service cost. The oilfield-services industry’s international (non-North American) business strikes us as more oligopolistic because of the scale needed to operate across disparate markets, so once a leadership position is established, it’s less likely a competitor could fully displace a firm like Halliburton.

Halliburton’s greater short-cycle exposure than its Big Three peers means its fundamentals should benefit sooner amid elevated oil prices.

While the number of crews actively fracking US shale is low relative to historical levels, Halliburton’s e-fracking solutions are winning in the market because they lower producers' total cost of ownership and emissions.

Halliburton's Venezuelan opportunity is potentially massive and could meaningfully improve its growth outlook; analyst estimates don't fully incorporate this windfall.

Demand destruction from elevated oil prices is a vicious cycle, as slowing economic activity means Halliburton’s customers will eventually pull back on capital spending.

Market consolidation and capital discipline among US shale producers will hurt services firms like Halliburton, both in terms of pricing and fewer available dollars going toward capital spending.

While Halliburton does enjoy a strong presence in the more resilient offshore completions market outside North America, this is a smaller piece of its business relative to SLB.