How Halliburton Plans to Expand While Staying on Top

Halliburton has plans to diversify away from its North American reliance while still being top dog in the North American unconventional market.

Look at the numbers
Year over year, Halliburton posted a 1.5% revenue drop from its North America operations, even as total revenue grew by 5%. Halliburton's Latin American, Europe/Africa/CIS, and Middle East divisions all saw revenue growth.

On the plus side, Halliburton's North American division posted 18% growth in its operating income versus 16.1% overall. While Halliburton's margins are improving, it still needs increasing revenue to grow in the long term.

Down south
In Latin America Halliburton increased revenue by 5.3% as adjusted operating income climbed 6.2% year over year. Sequentially Halliburton grew adjusted income by 57%. Halliburton's management had this to say about Latin America and Mexico:

"(W)e maintain our positive outlook for the region, and we expect Mexico will be a strong contributor to increasing revenue and profitability going forward."

Part of that will come from an increase in stimulation vessel usage, and part will come from more drilling in Mexico following energy reforms. It should be noted that management expects Mexican production curtails in the forth quarter, but after that it will be a strong source of growth.

Halliburton is partnered with Pemex (the Mexican Oil Monopoly), and Pemex is ramping down one of its projects until 2014 in preparation for the mega tenders. Once Pemex ramps up production, Halliburton's southern alliance will greatly benefit.

An even bigger catalyst is the high possibility of energy reform in Mexico. Pemex's output fell by 5% in the first six months of 2013, on top of a continuous decline over the past nine years of 25%.

If Mexico reforms its energy sector then private capital can finally enter Mexico's untapped oil reserves. Mexico is estimated to have 13.87 billion barrels of recoverable oil equivalent, but if private capital comes into the picture that number could triple.

What's even more exciting is that Mexico is home to the sixth largest shale reserves, which could add significantly to drilling activity. The U.S. Energy Information Agency sees Mexico's shale housing 555 trillion cubic feet of recoverable natural gas and 13 billion barrels of recoverable oil.

If Pemex lets in private expertise to tap into the shale, Halliburton will have a whole new drilling bonanza to cater to. Halliburton is already experienced in shale oilfield services, so it can easily offer Pemex the chance to frack for itself.

Latin America, particularly Mexico, offers Halliburton a good chance at both revenue and income growth. Improving North American margins are a major factor in bottom-line growth, but top-line growth is coming from elsewhere. As Halliburton is able to squeeze more cash out of its North American operations, it can invest more into new technologies.

"Frac of the Future"
Launched back in 2011, Halliburton's Battle Red initiative was aimed toward streamlining Halliburton's operations and integrating each operating segment. This will reduce overlapping costs, increase transparency and increase efficiency, all of which add to Halliburton's bottom line.

On the other side of things, Halliburton has launched its "Frac of the Future" program to stay on top of the fracking industry, particularly in North America. Part of its "Frac of the Future" program is to convert its pumps to the Q10, a new pump it designed to significantly outperform legacy pumps.

The idea is that previous pumps are close to reaching their limit, so Halliburton came up with a better, more effective model. Some aspects that make the Q10 superior are that it can provide up to 14 times the fluid end life of a legacy pump and that it has less downtime.

While this is catered toward the North American market, if Halliburton can reign supreme in the shale capitol then when international players want to start fracking (as some already have) they are more likely to turn to Halliburton.

Final thoughts
There is a lot more going on at Halliburton with the emergence of unconventional plays, but a few things are for certain.

First, Halliburton needs to keep winning international contracts to boost revenue. Second, Halliburton needs to keep its lead in the U.S. shale oilfield services market. And third, Halliburton can leverage its success in shale in the U.S. with the rest of the world.

Halliburton needs to be firing on all cylinders as it ramps up its North American frac fleet and attempts to move into Mexico's possible energy bonanza.

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