If sensational headlines are to be believed, the recent drop in oil prices signals the end of the U.S. shale boom. The reality, however, is likely to be more about a shift in focus than it is about a collapse. Yes, some shale oil is fairly costly to extract and some wells were only drilled because WTI at over $100 made them seem like a reasonable proposition, but the vast majority of producers and plays can survive with oil at these levels. According to IEA Executive Director Maria van der Hoeven in an interview with Reuters recently "…some 98 percent of crude oil…from the U.S. has a breakeven price of below $80 and 82 percent have a breakeven price of $60 or lower."
It is likely then that even if prices stay low, or even fall further, what we will see will be a shift of resources to the lower cost plays rather than a dramatic reduction in capacity or actual production. That is especially so given that, despite recent wobbles; global demand for energy is still increasing and will continue to do so for the foreseeable future. Obviously lower prices hit the margins of producers, so investors are rightly wary of throwing money at E&P companies until some stabilization is achieved. If production is continuing, however, but with the geographical emphasis being shifted, there is one group that would benefit from that; oilfield service companies.
Those companies have seen their stock fall as oil prices have collapsed but if production is shifted rather than…
If sensational headlines are to be believed, the recent drop in oil prices signals the end of the U.S. shale boom. The reality, however, is likely to be more about a shift in focus than it is about a collapse. Yes, some shale oil is fairly costly to extract and some wells were only drilled because WTI at over $100 made them seem like a reasonable proposition, but the vast majority of producers and plays can survive with oil at these levels. According to IEA Executive Director Maria van der Hoeven in an interview with Reuters recently "…some 98 percent of crude oil…from the U.S. has a breakeven price of below $80 and 82 percent have a breakeven price of $60 or lower."
It is likely then that even if prices stay low, or even fall further, what we will see will be a shift of resources to the lower cost plays rather than a dramatic reduction in capacity or actual production. That is especially so given that, despite recent wobbles; global demand for energy is still increasing and will continue to do so for the foreseeable future. Obviously lower prices hit the margins of producers, so investors are rightly wary of throwing money at E&P companies until some stabilization is achieved. If production is continuing, however, but with the geographical emphasis being shifted, there is one group that would benefit from that; oilfield service companies.
Those companies have seen their stock fall as oil prices have collapsed but if production is shifted rather than reduced their services will still be in demand. Little wonder then that this week saw one of the major players in the industry attempting to take advantage of that situation. There were rumors this week that multi-national giant Halliburton (HAL) were looking to buy U.S. headquartered rival Baker Hughes (BHI). This deal may or may not eventually take place, but it should tell investors that Halliburton is confident about the long range prospects of their business.
HAL has been hit as hard as anything over the last few months. The stock lost around 50 percent from July to October.
Interestingly, when news of the proposed buyout surfaced on Thursday the stock reacted positively. In general, companies don't look to expand if they see their business contracting for any noticeable amount of time and nobody is better placed to assess that particular business than Halliburton, the world's largest oilfield service company. Last year, Halliburton had revenues of over $29 billion and is on pace to grow that number again this year.
Putting aside the details of any deal that may happen and any possible synergies from it, Halliburton's management are making a statement about their prospects. They obviously don't see a collapse in their business coming and regard companies in the industry in general to be undervalued. If forced to choose between the view of a management team with a history of stellar success and that of traders with a short term mentality I know which I would favor.
Any way you look at it right now, HAL itself is cheap. It trades at just over 11x forward earnings; earnings that many analysts have revised downward recently. When you factor in a growth rate of around 21 percent, that is just crazy. It could be that if oil continues to fall HAL will be dragged down even further, but for a long term play anywhere close to $50 looks like a steal.
That Halliburton is even considering taking over a rival at this time tells us a lot. We would be foolish to ignore it.
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