ZEUS IQ And Volatile OPEC Markets Will Drive Drilling Trends

Key Takeaways

• Uncertainty in international markets and decreased activity in key regions could constrain Halliburton's revenue growth and negatively impact net margins.
  
• Volatile commodity prices and potential reductions in customer activity could pressure profits, while technological advances' impact remains uncertain.
  
• Uncertainties in international, North American, and commodity markets, along with significant charges, may pressure Halliburton's margins and future earnings.

Catalysts

Provides products and services to the energy industry worldwide.

• Halliburton faces uncertainty in international markets due to potential reduced spending amid macroeconomic risks, which could constrain international revenue growth, thus impacting overall company revenue.
  
• Decreased activity in Mexico and Saudi Arabia has negatively affected the Drilling and Evaluation division, leading to reduced operating income, indicating potential impacts on net margins if this trend continues.
  
• The oil and gas trade environment, coupled with faster-than-expected returns of OPEC production, adds volatility to commodity prices, potentially putting pressure on Halliburton's revenue from fluctuating demand.
  
• Halliburton's North American revenue faces challenges from potential reductions in customer activity, which may result in underutilization of fleets and affect profits, thereby compressing net margins and earnings.
  
• While technological advances like ZEUS IQ are promising, their full impact on Halliburton’s operational efficiency and productivity remains uncertain, posing a potential risk to achieving the anticipated improvements in operating margins.

Halliburton Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Halliburton compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Halliburton's revenue will decrease by 1.5% annually over the next 3 years.
• The bearish analysts are assuming Halliburton's profit margins will remain the same at 9.3% over the next 3 years.
• The bearish analysts expect earnings to reach $2.0 billion (and earnings per share of $2.31) by about May 2028, down from $2.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, up from 7.9x today. This future PE is greater than the current PE for the US Energy Services industry at 10.6x.
• Analysts expect the number of shares outstanding to decline by 2.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Halliburton Future Earnings Per Share Growth

Risks

• Halliburton's international revenue outlook for the year is expected to be flat to slightly down, which could negatively affect overall revenue growth.
  
• Lower-than-expected activity in Mexico and challenges in the North America market, where revenue declined by 12% year-over-year, may pressure earnings if not addressed.
  
• The uncertain trade environment and faster-than-expected return of OPEC production weigh on commodity prices and could impact Halliburton's margins and earnings.
  
• Recent volatility in commodity prices is causing customers to reevaluate activity scenarios, potentially leading to decreased demand for Halliburton’s services and affecting future revenue and earnings.
  
• A $356 million pretax charge related to severance costs, asset impairments, and environmental reserves indicates potential ongoing financial liabilities that may hinder net margins and profit growth.

Valuation

• The assumed bearish price target for Halliburton is $22.13, which represents two standard deviations below the consensus price target of $29.34. This valuation is based on what can be assumed as the expectations of Halliburton's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $36.0, and the most bearish reporting a price target of just $22.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $21.6 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of $19.36, the bearish analyst price target of $22.13 is 12.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.