Description

We like HAL, and currently own it alongside VAL and OIH as a cheap way to play the recovery in oil prices and associated drilling activity. If you don’t have a reasonably constructive view of oil prices, then this idea is likely worth skipping.

Why do we like HAL specifically? The company is one of the largest, most diversified oilfield services players. It provides pretty much every type of product used throughout the various stages of the oilfield lifecycle. In other words: 1. Geographic diversification; 2. Customer diversification; 3. Product diversification across oilfield lifecycle; 4. Scale. We don’t want to take strong views on exactly what oil producing regions recover better, the type of customer that recovers sooner (private shale vs. public shale vs. state owned etc.) – HAL gives us the most clear cut way to play the recovery. Some of the other oil-related ideas posted on VIC recently tend to be geared to a specific region and/or customer type. We aren’t trying to take that sort of view with this idea. For what it’s worth, we think that this recovery in drilling activity will initially be driven by private shale companies and state-owned players, and not public shale or supermajors.

For context – HAL is a business that, pre oil price crash in 2014, did ~$30B of revenue and $4-5B of EBIT. In 2018, when Brent averaged $71 and WTI $65 (best year post 2014 crash), HAL did $24B of revenue and $2.7B of EBIT. Brent is now $85 and WTI is $83… (let’s put aside the debate on drilling activity lagging the oil price recovery for a moment).

Consensus has 2021/22/23 revenues of $15B/$17.5B/$19.5B, EBIT of $1.8B/$2.5B/$3B, free cash flow per share of $1.19/$1.51/$2.06. That’s 12.5x/10.1x 2022/23 EBIT and 17.3x/12.6x 2022/23 free cash flow per share. Given the current oil strip, we think consensus numbers are too low and will continue marching hire. Getting a 6% yield at bottom of cycle performance into (what we think will be) a multi-year energy upcycle strikes us a being a very attractive risk/reward. Quoting the company’s last earnings release in July: “The positive activity momentum we see in North America and international markets today, combined with our expectations for future customer demand, gives us conviction for an unfolding multi-year upcycle.” Oil prices have only strengthened further since then. We also think skew is in your favor here…we think odds of an oil price shock are high vs. low risk of another COVID induced demand collapse.

As for the debate on drilling activity not rebounding as quickly as the historical norm with this oil price move (and hence the reason HAL / OIH have underperformed oil) – we think there are two main factors at play. 1. Shale producers and supermajors are indeed being more disciplined on drilling to please shareholders; 2. Public company management teams have been burned so badly during this extended 7 year downturn (capped off by the COVID shock) that they are being very cautious. As a result, we expect to see E&P Capex accelerate first for private shale producers and state owned companies, before eventually the public companies can no longer ignore such attractive IRRs and also start drilling again. Ultimately, capital will find its way to new drilling activity when new well IRRs become too compelling to ignore.

We think consensus numbers for HAL will continue to move higher and the stock will follow. As the cycle firms further, we think it’s possible HAL does $2.50 per share in free cash flow and trades at 15x, giving us a price target of $35-40. We think there is upside beyond this depending on how the cycle plays out.

Catalyst

Oil prices and consensus numbers continue their march higher...the stock will follow.