Fossil Dependency Will Fail Amid Rapid Decarbonization

Key Takeaways

• Decarbonization trends, ESG investing, and regulatory pressures threaten Halliburton's revenue, profitability, and future project pipeline.
  
• Market concentration and increased competition heighten risks of revenue volatility, pricing pressures, and unstable cash flows.
  
• Expanding international demand, technology leadership, strategic market shifts, and disciplined cost management are strengthening Halliburton's operational resilience and positioning for sustainable, profitable growth.

Catalysts

Provides products and services to the energy industry worldwide.

• Accelerating global transition toward renewable energy sources and stricter decarbonization targets threaten to reduce demand for oil and gas exploration and production in the coming years, directly undermining Halliburton's core business and leading to a long-term decline in revenue growth opportunities.
  
• Increasing regulatory pressure, including the risk of carbon pricing and heightened climate-related compliance costs, is expected to erode net margins over the long-term, putting sustained pressure on Halliburton's profitability despite ongoing cost management efforts.
  
• A growing trend of ESG-focused investing and institutional divestment from fossil fuel-related sectors could further limit capital access for both Halliburton and its E&P clients, restricting Halliburton's future project pipeline and suppressing earnings growth.
  
• Halliburton's heavy reliance on North America and select international markets exposes it to cyclical downturns and overcapacity in these regions, and with rig counts continuing to decline and service price reductions persisting, revenue volatility is likely to increase, with greater challenges to maintain stable cash flow over the next several years.
  
• Intensifying competition from local service providers and national oilfield companies in key international markets, coupled with a slower-than-expected growth in global oil demand as electrification advances in major economies, signals prolonged downward pressure on contract wins, pricing, and ultimately both margin expansion and return on invested capital.

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 3.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 8.4% today to 8.0% in 3 years time.
• The bearish analysts expect earnings to reach $1.6 billion (and earnings per share of $2.18) by about July 2028, down from $1.9 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 12.2x on those 2028 earnings, up from 10.1x today. This future PE is greater than the current PE for the US Energy Services industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 2.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Halliburton Future Earnings Per Share Growth

Risks

• Despite near-term softness, Halliburton is seeing strong and expanding international demand for advanced technology, unconventional development, and production solutions, which is evidenced by double-digit growth in international unconventional and artificial lift services; this growth supports longer-term revenue expansion and geographic diversification.
  
• The company's leadership and customer adoption of digital oilfield and automation platforms such as ZEUS IQ, iCruise, LOGIX, and iStar are enhancing differentiation and operational efficiency, which is likely to support industry-leading margins and drive higher earnings over time.
  
• Halliburton is maintaining pricing discipline, scaling down uneconomic operations, and executing cost reductions to protect margins and free cash flow during downturns, which is likely to lead to improved net margins and more resilient earnings through cycles.
  
• The strategic shift toward high-growth international markets, especially in regions such as Latin America, Australia, Norway, and the Middle East, is reducing reliance on cyclical North American markets and increasing the stability and resilience of the company's revenue base.
  
• Ongoing investment in technology and integrated project management is securing major contract wins and expanding Halliburton's share in high-value services such as artificial lift and well intervention, supporting potential for long-term improvements in top-line growth and returns on invested capital.

Valuation

• The assumed bearish price target for Halliburton is $20.0, which represents the lowest price target estimate amongst analysts. 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 $35.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $20.2 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $21.97, the bearish analyst price target of $20.0 is 9.8% lower.
  
• 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.