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Morningstar | Slightly Reducing Halliburton and Schlumberger Fair Value Estimates Due to Industry Headwinds. See Updated Analyst Note from 21 Dec 2018

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.