Morningstar | Slightly Reducing Halliburton and Schlumberger Fair Value Estimates Due to Industry Headwinds
We're lowering our fair value estimates for two oilfield service companies, with Schlumberger moving to $62 per share form $65 and Halliburton to $34 from $36. The lower fair value estimates come chiefly from a slightly lower long-term oil & gas capital expenditure forecast that drives revenue for both companies. Our narrow moat ratings for both names remain unchanged.In particular, we now think international (ex-North America) oil and gas capital expenditures will grow about 20% cumulatively over 2018 levels by 2022, driving about 25% total addressable market growth for international diversified service companies, versus our prior expectation of about 30% addressable market growth. We think Halliburton's international revenue will grow in line with this 25% total addressable market growth. We think Schlumberger's international revenue can grow 40% cumulatively through 2022, owing to market share gains stemming primarily from the company's integrated business lines, such as Integrated Drilling Services and Schlumberger Production Management.
For Halliburton, we've also lowered our near-term expectations for North America revenue and profits. We think the competitive pressures in the U.S. shale end market (the key reason for our negative moat trend assessment) are playing out quicker than we had previously anticipated, as evidenced by the severe pricing dip in pressure pumping beginning in the second half of 2018. To be sure, this is partly due to the temporary hit to pressure pumping demand stemming from Permian Basin takeaway constraints. Still, the severity of the impact on pricing reinforces our view of the mostly "no moat" nature of pressure pumping.
After the revision, both companies still look undervalued. Schlumberger, in particular, is trading over 40% below our fair value estimate and has now breached its 2009 post-financial crisis low to set a new 13-year share price low. The market is now pricing in virtually zero international revenue growth for the company, which we view as implausibly low.
Halliburton assists its customers throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion and optimizing production throughout the life of the asset. The company's segments are: Completion and Production, which delivers cementing, stimulation, intervention, pressure control, specialty chemicals, artificial lift and completion products and services; and Drilling and Evaluation, which provides field and reservoir modeling, drilling, evaluation and wellbore placement solutions that enable customers to model, measure, drill and optimize their well construction activities.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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