U.S. oil economics have shifted. Here’s who benefits.

  • By Avi Salzman,
  • Barron's
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When the era of “drill, baby, drill” ended in the U.S. a few years ago, it looked to be bad news for Halliburton (HAL), which sells the equipment and the services to drill. From 2018 through 2020, that sense of doom was validated by weak stock performance and job cuts.

Those dark clouds are passing now. Halliburton ’s CEO said on Tuesday that the new era of oil—one characterized by less drilling but consistently higher prices—has set the company up for years of strong performance, low debt, and pricing power. Halliburton stock was down 1.7% on Tuesday despite beating earnings estimates.

“Current oil supply tightness and commodity price levels strengthened my confidence in the accelerating multiyear upcycle and very busy years ahead for Halliburton,” said CEO Jeff Miller on the company’s first-quarter earnings call.

Halliburton is the top oil services company in the U.S., with specialized operations designed to get the most out of the country’s vast shale oil deposits.

With oil above $100 a barrel and a supply shortage around the world, U.S. oil is in higher demand than ever. But it won’t be easy to get it out of the ground. Halliburton says its equipment is sold out for the second quarter, and nearly sold out for the second half of the year. Even if producers wanted to drill more, they would be hard-pressed to find the equipment. If they want it bad enough, they’ll have to pay up.

In fact, the oil services industry is looking more like an oligopoly today in the U.S., with just four pressure-pumping companies controlling two-thirds of the market. They now can raise prices after a long period when they were selling their services at a relative discount. The big players have a financing advantage too. Lenders have shied away from investing in new oil and gas projects, both for environmental reasons and poor past investment returns, making it hard for new entrants to obtain financing. Companies that can self-finance their equipment have an enormous advantage, Miller said. “We see a long runway for ongoing net pricing improvement across all of our product service lines,” he said.

What’s more, producer behavior is shifting in a way that benefits Halliburton, which has become more focused on shale and less on larger conventional oil projects. Shale projects are “short-cycle.” They can be stopped and started more quickly than offshore projects, which need constant investment and pay off over a multiyear period.

“I believe supply dynamics have fundamentally changed due to investor return requirements, public ESG commitments, and regulatory pressure, which make it more difficult for operators to commit to long-cycle hydrocarbon investments and instead drive investment flexibility through short-cycle barrels,” Miller said.

That style of investment means oil prices should stay high. If companies can quickly turn off the spigot when prices fall, there is “a perpetual threat of undersupply that is supportive to commodity price,” the CEO asserted.

“In contrast, long-cycle projects have two key elements—a long time horizon and large upfront capital investment,” he said. “Once these projects begin, investment continues and production cannot quickly respond to price signals. This tends to result in market oversupply.”

If it holds, the trend should benefit other companies that focus on shale drilling, such as Liberty Oilfield Services (LBRT) and Patterson-UTI (PTEN).

It might not be as good news for Halliburton rival Schlumberger (SLB), however. Schlumberger sold its North American fracking business to Liberty in 2020, though it took an equity stake in Liberty.

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