Halliburton, Aramco Unite To Boost Saudi Arabia Gas Output

Halliburton Company (NYSE:HAL) recently inked the unconventional gas stimulation services three-year contract with Saudi Aramco, in a bid to unleash a natural gas revolution in Saudi Arabia. Per the deal, the oilfield services major will provide project management, hydraulic fracturing and well intervention services to meet Saudi Aramco’s production targets and improve the economics of its unconventional resources program. The program mainly covers three regions, namely Northern Kingdom, South Ghawar and Jafurah Basin.

Deal Benefits

While Halliburton has been a major player in the U.S. shale drilling across Texas, North Dakota, Oklahoma, Louisiana, the company has also successfully expanded its operations in Argentina, Poland, Canada, Mexico, among others. On entering into a three-year contract in Saudi Arabia, the company has further expanded its geographical footprint, along with boosting its backlog and revenue prospects.

Though Saudi Aramco is the world’s top exporter of oil, Saudi Arabia also has a huge natural gas potential, holding the world’s fifth-largest gas reserves. By 2026, the government aims to produce some 651 billion cubic meters of natural gas per day -- almost double its current output. However, much of it is difficult to recover from shale rock and tight sand. Hence, the company intends to utilize Halliburton’s specialized technological services to tap into those resources.

The contract will boost Saudi Aramco’s efforts to spur natural gas production for meeting the domestic needs as well as shoring up its evolving chemical industry, by providing the essential raw materials. The state-run company also intends to reduce its practice of burning oil for domestic power, thus freeing up more barrels for exports. Notably, over the past year, Saudi Aramco has awarded $4.5 billion worth contracts to international oil service companies, for increasing the country’s gas output.

The deal is also in sync with Saudi Arabia’s reform program “Vision 3030,” which has the goal of making its economy less reliant on oil prices. Under the reform plan, the country aims to fuel economic modernization and foreign investment. Saudi Aramco’s plans for IPO are also part of its Vision 3030, as the company intends to diversify globally.

While the IPO offering plans have made a slow progress, the company is getting more involved with downstream efforts and aiming to maximize its value by making investments in refineries and chemical plants. Saudi Arabia is taking a keen interest in investing in Texas petrochemical plants, and the refineries in Corpus Christi and Port Arthur. In fact, it is planning to invest $18 billion in its U.S. subsidiary, Motiva Enterprises LLC's Port Arthur refinery that has a processing capacity of 603,000 barrels of crude per day.

Middle East Shale Drilling Picks Up

Although shale drilling in North America has been on a roll, doubling its production and making it a major hydrocarbon exporter, the shale revolution is still limited to a few countries. However, the interest in shale drilling has been on a gradual rise in the Middle East and North Africa lately.

Last month, Bahrain discovered extensive oil and gas resources off its west coast and also inked a deal with Halliburton to commence the drilling of two appraisal wells, and further evaluate the potential of the reservoir. Recently, there were also reports about Algeria’s state energy firm Sonatrach seeking collaboration with Exxon Mobil Corporation (NYSE:XOM) to develop the country’s shale gas. While the details of the latest Halliburton-Aramco contract are not disclosed, it aims to unlock the natural gas boom in Saudi Arabia.

Zacks Rank and Key Picks

Halliburton currently carries Zacks Rank #3 (Hold).

Some better-ranked players within the same industry include Nine Energy Service, Inc. (V:NINE) and Select Energy Services, Inc. (NYSE:WTTR) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nine Energy’s 2018 earnings are expected to grow 181.67% year over year.

Select Energy delivered an average positive earnings surprise of 189.58% in the trailing four quarters.

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