Halliburton Company

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Halliburton is a global provider of products and services to the energy industry, primarily focused on oil and gas exploration and production. Their services range from well construction and completion to production-related offerings, serving both onshore and offshore operations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Moat Assessment:

Halliburton’s operations are primarily concentrated in the energy sector, specifically oil and natural gas exploration and production. It operates globally with a strong presence in North America, the Middle East, and other key energy-producing regions. To understand Halliburton’s competitive advantages, we must analyze the barriers to entry and the sustainability of their advantages.

While Halliburton operates within the energy service industry— an area with high barriers to entry, requiring significant capital investment, specialized expertise, and an extensive global presence— it faces a lot of competition from the larger players like Schlumberger, Baker Hughes and other regional competitors. They do have a well-established brand and decades of operational experience, but these are not truly a strong defense against competitors. Here’s a breakdown of Halliburton’s potential moats:

  • Network Effects: Halliburton is not a platform business and therefore, it does not have any relevant network effects that would lead to some sustainable advantage.

  • Switching Costs: Some switching costs exist, given the high degree of customization and the high costs of rig changes that involve swapping out the different systems they use with their own (for example, the pressure controls, the drilling management equipment, the fluids and chemicals they use, etc). In the last years, they seem to have developed a higher value proposition by building their own digital service delivery ecosystem that makes this even more important. However, the switching costs are not high enough to keep the clients when other better options appear.

  • Intangible Assets: They have a long history, know-how, patents, and brand but so do all the other players. That means they are important but not enough of a moat on their own.

  • Cost Advantages: Their main competitive strategy is cost optimization which gives them a low cost production and makes them win contracts. They offer a broad mix of services and have the scale required to be profitable. They also have some proprietary manufacturing and supply capabilities. However, these cost-cutting methods are easy to copy.

Moat Rating: 2/5 - Narrow Moat

Halliburton possesses elements of a narrow moat through some switching costs and brand strength but it’s not particularly strong or durable because many competitors offer similar products and services and they are unable to provide a very differentiated offering.

Risks to the Moat and Business Resilience:

  • Industry Cyclicality: The oil and gas industry is inherently cyclical, dependent on commodity prices, demand, and production levels which are all very volatile. Downturns can dramatically reduce demand for Halliburton’s services, significantly impacting its revenue, profitability, and stock price.
  • Competition: Halliburton faces stiff competition from other major service companies. As prices of the Oil and Gas go up, new competitors will appear, and a decline in oil and gas prices can lead to acquisitions or consolidation in the market, increasing the concentration.
  • Technological Disruption: New innovations in drilling and completion technologies may challenge existing methods, requiring Halliburton to continually invest in R&D. There is not as much emphasis on technology or innovation and that might lead to slow and old tech.
  • Political and Regulatory Risks: Halliburton’s operations are subject to various political and regulatory risks, especially when operating in multiple countries with different governance and standards. Any changes in the regulatory landscape can affect their profitability and operations. In addition, any new restrictions on Russia’s Energy exploration operations would be catastrophic to the company (especially long term).
  • Operational Execution: Inadequate financial management, operational mistakes, and supply chain disruptions can disrupt their results.
  • Environmental Concerns: Increasing emphasis on renewable energy and sustainable practices might reduce the demand for oil and gas exploration, leading to lower demand for Halliburton’s services and equipment.

Business Resilience: Halliburton has shown resilience in that it has managed to adjust their operations in a very diverse set of geographies and clients. They have a clear focus on cost controls and innovation that provides them with a high degree of financial stability. However, they remain very exposed to the volatility of the markets and should take a big hit in a market downturn.

Detailed Business Explanation:

  • Revenue Streams: Halliburton’s revenue is segmented into two main divisions:
    • Drilling and Evaluation (D&E): This division provides services and products such as well construction and drilling, downhole tools, and integrated drilling systems. It generates a substantial portion of Halliburton’s revenue.
    • Completion and Production (C&P): This division includes products and services used in well completion, production optimization, artificial lift, and other related services. This division focuses on maximizing well productivity once the well is operational.
  • Geographic Diversification: The geographic distribution of the company is very extensive, in 2023, they had 45% of revenue from US, 25% from Europe and Africa, 19% from middle east/asia and 11% from Latin America. They are truly international and operate in all the Oil producing regions.
  • Industry Trends: The oil and gas industry is experiencing a complex period of change. Demand is still high and the sector is very profitable, but at the same time, the pressure of transition towards renewable energy, geopolitics, and supply chain issues create volatility and uncertainty.
  • Margins: Gross profit margins range from 20% to 25% but can vary depending on the segment and the economic environment. In the 1st quarter of 2023, they had an overall gross profit margin of 24.8%, with operating margins varying from the geographical segment.
  • Competitive Landscape: Competitors include giants like Schlumberger, Baker Hughes, and other regional players such as Halliburton’s business depends on their ability to provide better and cheaper solutions than their peers. A lot of innovation and investment is occurring at the same time as other companies in the sector.
  • What makes them different: They have focused their efforts on creating a digital and value-added product offering with good results. Their scale also allows them to have some price advantages.

Financials In-Depth:

  • Income Statement: As of Q1 2024:

    • Revenues came in at $5.803 billion, up from 5.1 billion last year. It is mainly driven by better demand for their offerings in the international market.
    • Operating income at $1.003 billion, up from $511 million last year.
    • Their operating margins are around 17% but their profitability is highly dependent on geography and their pricing power.
    • Net income of $616 million was substantially better than the $263 million last year.

    They have been able to improve their income in the last years and maintain stability in revenues and profitability even during downturns. They can do that because they are not as reliant on the short-term pricing pressure due to the business structure.

  • Balance Sheet:

    • Their total assets reached $24.9 billion with cash and cash equivalents standing at $3.3 billion.
    • Their total liabilities are at $20.6 billion with long-term debt of $8 billion.
    • Stockholder’s equity stands at $4.2 billion.

    The cash levels are manageable and they have the flexibility to access debt markets in favorable terms to service existing debt. Their debt is at a manageable level, for a company of its size. However, this amount of debt can expose them to increased risk in case their revenues decline dramatically.

  • Cash Flow Statement:

    • Operating activities generated $774 million in cash flow. They also spent around $348 million in capital expenditures and 1.1 billion on investing activities. They also spent $590 million on financing which also includes repurchasing stock.
    • Their operations are a good generator of cash, which is important.

Balance Sheet Health: 3 / 5

Halliburton’s balance sheet health is considered stable, but it has a very high amount of debt that exposes it to financial stress in downturns. Also, the equity value does not seem very strong compared to other firms in the same sector.

Understandability: 4 / 5 Halliburton’s operations are complex, requiring an understanding of the oil and gas industry and the various drilling and production techniques. However, their business model is relatively straightforward as a service-based company. Given the cyclicality of the industry, their revenues and profitability can vary widely. Despite that, their business model can be considered as not overly complicated and easy to understand for the most part.

Recent Concerns/Controversies:

  • Russia Operations: During the Q1 earnings call, the company mentioned they had suspended new operations in Russia. The Russian market was very important for them and in the past generated around 5% of their revenues. Although they do not report large losses due to that, this may have an impact in their future outlook.
  • Share Buybacks: On the earnings call, they were asked about their current share buyback program and how the higher prices of their stock were impacting it. They mentioned they have taken a break for a moment from buying back shares, but they still expect to resume soon enough. This demonstrates a management team that does not know a good buying price and it could further prove to be a waste of funds.
  • Pricing Pressure: Some management calls have shown some concern that some clients are beginning to demand better prices. This could potentially hamper their growth.

In Conclusion, Halliburton operates in a complex and challenging environment, but it has shown some strengths that, if sustained, can provide for long-term value. Their main problems remain their high debt and susceptibility to volatility in the energy industry.