Valuation and Competitive Positioning of Halliburton-US

This assignment analyzes the competitive positioning, valuation, and risks faced by Halliburton, a leading oil field services company in the US. It covers the business model, company history, management, industry landscape, competition, macro conditions, DCF valuation, relative valuation, and risk management. The assignment provides insights into the strengths and weaknesses of Halliburton in dealing with market rivals.

INDIVIDUAL FACT SET
(HALLIBURTON-US)

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................1
BUSINESS DESCRIPTION......................................................................................................1
Business model.......................................................................................................................1
Company history....................................................................................................................1
Management and governance.................................................................................................2
COMPETITIVE POSITIONING...............................................................................................3
Industry landscape..................................................................................................................3
Competition............................................................................................................................3
Macro conditions....................................................................................................................3
VALUATION- DCF..................................................................................................................4
Key assumptions and justifications........................................................................................4
2-stage model of free cash flow..............................................................................................4
The accuracy of analysis........................................................................................................5
DCF analysis..........................................................................................................................6
VALUATION- RELATIVE......................................................................................................8
Choice of market rivals..........................................................................................................8
Choice of EV multiples..........................................................................................................9
Analysis..................................................................................................................................9
VALUATION- FURTHER ANALYSIS...................................................................................9
Residual Income.....................................................................................................................9
Sensitivity Analysis..............................................................................................................10
Simulation.............................................................................................................................10
The authenticity of analysis..................................................................................................10
RISK MANAGEMENT...........................................................................................................11
Key risk factors.....................................................................................................................11
Risk mitigation strategies.....................................................................................................11
RECOMMENDATION...........................................................................................................11
CONCLUSION........................................................................................................................12
REFERENCES.........................................................................................................................13

INTRODUCTION
Nowadays, entities strive hard to maintain its position in the external market by
beating all the competition by introducing innovation on its business services. Maintaining its
survival in a well of competition is very tough in the current market of the US where every
second innovation business gets launches. This poses a direct threat to all the existing
companies who depend on traditional practices. This assignment is about a company whose
business structure is analysed in terms of monetary as well as non-monetary criteria’s to
know its strengths and weaknesses to deal with the rivals in the market. Halliburton Company
of the US has been considering for this study in which clear cut analysis of this entity will
cover all the hidden unknown aspects of this business. This assignment will draw the
attention of all the users on competitive positioning of an entity, its financial valuation and all
the risks face by this venture is explained in detail with the help of this research.
BUSINESS DESCRIPTION
Business model
Oil Field Services Company named as Halliburton which is an American
transnational company (Katysheva, 2018). This is considered as the world's largest
corporation that operates its business in 70 plus major countries. This is a public limited
venture which is also listed under the New York stock exchange to test its destiny to earn
more wealth by taking a risk (Halliburton Company, 2018). By taking higher risks, this entity
maintains its image in front of all the stakeholders that its firm has the capability to take
higher risks which, in turn, attracts all the investors to invest in its company (Katysheva,
2018).
Company history
Talking about the history of this company which come into existence in 1919 that is
almost 100 years ago, Erle Halliburton founded this company in Duncan, Oklahoma in the
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United States of America. After one year of the foundation of this business, in the year 1920,
the owner used wild gas well under the name of this company to offer a variety of services to
all its clients (Singh, Alkharusi, Mattar, Kakira&Plotnikov, 2018). This strategic move of an
entity is praised by all the stakeholders which are a reason behind the current success of this
enterprise. In 1924, the company opens it’s another branch in Delaware with an employee
base of 56 people. In 1926, they indulge in its first foreign transaction by selling its business
equipment to Burma and India (Nakamura, Steinsson, Sun &Villar, 2018).
Figure 1 History of Halliburton
Management and governance
Halliburton Company of oil field services is managed and governed by main
headquarters located in Houston in Texas in the United Nations. This is a parent company
which comprises of lots of subsidiary companies forming an integral part of this business
(Grigoryan& Lopez, 2018). The subsidiary of this enterprise consists of Baroid International
trading, BITC Holdings, Halliburton investments, Halliburton Affiliates, Halliburton Canada
Corporation and many more. Announcements and business actions released by the parent
company that is from the headquarter of this venture is to be followed by all its subsidiaries.
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Financial reports prepared by subsidiaries will first go to the parent company as the parent
company’s auditors will examine the books of accounts of all the firms. As per IFRS, a parent
company will file the financial reports of its subsidiaries together with its own financial
statements (Smith, Driver & Matthews, 2018).
COMPETITIVE POSITIONING
Industry landscape
Halliburton falls under the oil and gas industry of the United States so it is essential to
know about this industry in analysing the position of this business. The recent study says that
the oil and natural gas industry of the United States is stable and strong. Due to trump’s
action, crude oil has exported from Iran creates a favourable situation for the oil and gas
industry. This act of the US government is beneficial for all the companies operating in this
industry so as for Halliburton (Zborowski, 2018). The industry is growing slowly and
gradually which will allow Halliburton to take advantage of all the future opportunities to
earn higher market share.
Competition
Halliburton is facing direct or indirect competition from carbo ceramics, Dynamic
materials corporations, weather fold and Schlumberger which falls under a similar industry as
this entity is operating its business (Competitors of Halliburton, 2018). Carbo ceramic offers
oil and gas products to the industrial markets posing a direct threat to this company. On
another hand, DMC offers energy savings products to industries and real estate markets
posing indirect competition to this entity. Weather fold spreads its business services to all the
domestic regions of Texas and all across the world as this provides multinational products to
shrink the existing market of Halliburton.
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Macro conditions
The macro environment will comprise of the inflation rate, employment gross
domestic product of the economy (Elango, Dhandapani &Giachetti, 2018). In analysing the
macro condition of Halliburton, it is essential to draw light on all these factors in terms of the
US economy to know the economic ability of Halliburton in operating US economy (Inflation
rate in the US, 2018). A current inflation rate of US for the year 2019 is 1.5% which was
2.5% in the previous period which shows the efficiency of the entire economy. The
decreasing the inflation rate will stabilize the oil and gas prices charged by the company.
The trend of GDP gets keeps on increasing from one period to another which depicts
the increasing performance of all the companies located in the US that contributes to
inclining trend of GDP (GDP of US, 2018).
Employment level of US gets decreases from 5% to 4% which shows unemployment
in the country which will eliminate by the economy by introducing more employment
opportunities (Employment in US, 2018).
VALUATION-DCF
Key assumptions and justifications
Discounted cash flow is a valuation model utilizes by an entity in estimating the
investments options taken by an enterprise. Before applying the model of DCF analysis in
estimating the worth of Halliburton, it is important to know all the assumptions of this model.
This includes consistent growth rates, excluding regression beta, not considering % terminal
values and using only long term risk-free rates (Wu, Al-Khateeb, Teng & Cárdenas-Barrón,
2016). All these assumptions will guide an individual in forming its analysis in a particular
direction to determine the right output at the right time.
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2-stage model of free cash flow
This model is used by a user in identifying the worth of the equity held in a business
(Chen, Sun & Xu, 2016). In this model, some of the things used as an input to determine the
final output of this approach such as growth period, predicted growth rate, Initial investment,
depreciation and working capital, the expected growth rate in the stable period and finally the
cost of equity. All these values are used in estimating the value of the equity to compare it
with the value of debt to know the proportion of debt or equity held in a business (Nguyen &
Nguyen, 2018).
Accuracy of analysis
Halliburton Co., free cash flow to equity (FCFE) forecast
USD $ in millions, except per share data
Year Value FCFE(t) or TV(t) Present value at
13.48%
0 FCFE(0) 904
1 FCFE(1) 838 739
2 FCFE(2) 812 631
3 FCFE(3) 821 562
4 FCFE(4) 865 522
5 FCFE(5) 948 503
5 TV(5) 26,426 13,875
Intrinsic value of Halliburton Co.’s common stock 12,551
Intrinsic value of Halliburton Co.’s common stock (per share) $19.29
Current share price $28.56
Figure 2 FCFE of Halliburton
Halliburton Co., H-model
Year Value g(t)
1 g(1) -7.25%
2 g(2) -3.05%
3 g(3) 1.15%
4 g(4) 5.35%
5 and
thereafter g(5) 9.55%
Figure 3 Growth rates
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Assumptions
The rate of return on LT
Treasury Composite 2.73%
The expected rate of return
on market portfolio 12.00%
Systematic risk (β) of
Halliburton Co.’s common
stock 1.16
The required rate of return
on Halliburton Co.'s
common stock 13.48%
Figure 4 Required rate of return
CAPM Calculations
Rf+Beta(Hal)[Rm-Rf]
= 2.73%+1.16[12%-2.73%]
= 2.73%+10.7532%
= 13.48%
Interpretations
The free cash flow equity model mention above shows the efficiency of equity whose
value gets increases gradually from one period to another. The cost of equity of the company
is higher that is 13.48% which is estimated using the capital asset and pricing model
(Guizani, 2018). Higher costs of equity couples with cost burden for an entity to pay off the
dividends to all its shareholders who will, in turn, decrease the profits and revenues earned by
an enterprise.
DCF analysis
Halliburton Co., dividends per share (DPS) forecast
Year Value DPS(t) or TV(t) Present value at 13.48%
0 DPS(0) 0.72
1 DPS(1) 0.67 0.59
2 DPS(2) 0.65 0.50
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3 DPS(3) 0.66 0.45
4 DPS(4) 0.70 0.42
5 DPS(5) 0.78 0.41
5 TV(5) 30.83 16.35
The intrinsic value of Halliburton Co.'s common stock (per
share) $18.73
Current share price $28.56
Figure 5 DCF analysis
Halliburton Co., H-model
Year Value g(t)
1 g(1) -7.25%
2 g(2) -2.75%
3 g(3) 1.74%
4 g(4) 6.24%
5 and thereafter g(5) 10.73%
Figure 6 Growth rate
Assumptions
The rate of return on LT Treasury Composite 2.73%
The expected rate of return on market portfolio 12.00%
Systematic risk (β) of Halliburton Co.’s common
stock 1.16
The required rate of return on Halliburton Co.'s
common stock 13.48%
Figure 7 Required rate of return
Particulars Averag Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
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e 2018 2017 2016 2015 2014
Selected Financial Data (USD $ in millions)
Cash
dividends 630 626 620 614 533
Net income
(loss)
attributable
to the
company 1,656 -463 -5,763 -671 3,500
Revenue 23,995 20,620 15,887 23,633 32,870
Total assets 25,982 25,085 27,000 36,942 32,240
Company
shareholder
s’ equity 9,522 8,322 9,409 15,462 16,267
Ratios
Retention
rate 0.62 – – – 0.85
Profit
margin 6.90% -2.25% -36.27% -2.84% 10.65%
Asset
turnover 0.92 0.82 0.59 0.64 1.02
Financial
leverage 2.73 3.01 2.87 2.39 1.98
Averages
Retention
rate 0.73
Profit
margin -4.76%
Asset
turnover 0.80
Financial
leverage 2.60
Dividend
growth rate -7.25%
Figure 8 Growth rate
VALUATION- RELATIVE
Choice of market rivals
From a business perspective, the choice of all the competitors of Halliburton is
assessed carefully to include the same in crafting strategies. An entity will watch out all the
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strategies prepared by its rivals to create a unique strategy for beating the current market
competition (Elango, Dhandapani & Giachetti, 2018). A change takes place in the stock price
of the company is closely observed to eliminate the current weaknesses and turn it into its
strengths to capture a higher share in the external market. Halliburton struggled hard in the
last quarter of 2018 as the stock price of the company was under $30. DMC and weather fold
target this entity due to its lower stock price by shifting the interest of the investors towards
their businesses.
Choice of EV multiples
Two of the valuation types which an entity will consider in assessing its own
performances to determine the impact of the external factors on its business structure. This
will consist of Equity multiples and enterprise value multiples (López& Martín, 2019). All
these valuation multiple’s aims are to test the performance of the company in terms of its
sales, earnings before interest and tax and earnings before tax and depreciation by comparing
it’s with the enterprise value of the business. Enterprise value is nothing but a summation of
equity and debt used in forming a capital structure of an enterprise (Singh, Jain &Yadav,
2018).
Analysis
Equity Multiples- This kind of valuation kind uses by an investment in evaluating various
investment options to select the best suitable option which generates higher revenue for the
business. This comprises of P/E ratio, earning per share, Price to book ratio, dividend yield,
and price to sales ratio (Ahmed &Jilani, 2018).
Enterprise value ratio- This approach is suitable in the condition of acquisition or mergers
takes places in an entity where the purchaser considerations decided on the basis of the value
of an enterprise. This will include enterprise value/revenue, EV/EBITDAR, EV/EBITDA and
enterprise value /invested amount.
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VALUATION- FURTHER ANALYSIS
Residual Income
It is another model used to estimate the value of equity under which the cost of equity
is deducted from the net income of an enterprise to determine the residual income. This
residual income denotes an income after excluding the part of equity from it to be purely
called as a business income. The cost of equity is calculated by CAPM which will further be
deducted from the net income of Halliburton.
Residual Income= Net income- Cost of equity (Calculated through CAPM)
Sensitivity Analysis
This is a valuation model used in financial modelling where the effect of the
independent variable on the dependent variable is analysed using several criteria’s such as the
effect of sales on the enterprise value as sales (Hamdia, Ghasemi, Zhuang, Alajlan&Rabczuk,
2018). These model works on a periodic basis in which criteria's are set according to the
situations come across by an individual to achieve its desired outcomes.
Simulation
Monte-Carlo simulation will consider by an individual in evaluating the financial
facts and figures of the company (Vrugt, 2016). This is another method of valuing all the
equity held in a business. In this approach, descriptive statistical methods such as mean and
standard deviation used to judge the authenticity of the collected data. This will help in
making judgements about the efficiency and the effectiveness of investment opportunities.
Authenticity of analysis
Measures of central tendency and measures of dispersion are used to test the collected
data to estimate the quality and the quantity of the equity source of finance as compared to
the debt as a source of finance (Schacht, 2018). After the results of this analysis, an entity
owner will consider the values in developing an appropriate capital structure (Hollingsworth,
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2016). Formula and standards will help a user in moving its research in a proper direction
which will generate fruitful results for the business enterprise.
RISK MANAGEMENT
Key risk factors
The risks factors identified by an individual after analysing the overall business
structure of Halliburton which deals in the oil and gas industry in the United States of
America (The Oil and Gas Situation: In the U.S., Stable and Strong, 2018). Changing prices
of oil and natural gas by the industry will pose a direct risk to the company whose pricing
structure will get affected with a singular change takes places in the industry’s prices.
Another risk faces by this entity is of a new strategy of its competitors who tries to
lure all the clients or customers of this entity to contract the existing market share of
Halliburton.
Risk mitigation strategies
Risk Low Moderate High Risk mitigation
strategy
Changing the
price of oil and
gas by industry
Keeping a close
watch on the
industry and
analyse the past
industry’s trends
Strategy of
competitors
Evaluating
competitor’s
strategies
RECOMMENDATION
It is recommended to Halliburton to use business process management systems to
automate all its business activities to generate fruitful results for its business in meeting all its
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weaknesses. The risks factors identified by an entity will get overcome by using this
particular tool which helps the company in eliminating all the issues. Using BPM an entity
will able to keep track of the activities of all its rivals.
CONCLUSION
It is summarized from the above study that Halliburton’s position in the external
market of the united nation is strong and stable just like the condition of the industry. The
liberated cash flow to impartiality and economical cash flow of the company is also
increasing with the passage of time. This shows the efficiency of the business which allows
all the investors to invest in this venture to get higher returns which creates a future
opportunity for all the potential buyers. The likelihood of risks is high which mandates an
entity to overcome the same in a given time to safeguard its position from being affected by
external factors.
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Online
Competitors of Halliburton, 2018. Available through: < https://craft.co/halliburton-
company/competitors> [Accessed on 28th March 2019].
Employment in the US, 2018. Available through: <
https://www.statista.com/topics/771/employment/> [Accessed on 28th March 2019].
GDP of US, 2018. Available through: < https://tradingeconomics.com/united-states/gdp>
[Accessed on 28th March 2019].
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Halliburton Company, 2018.Available through: <
https://www.halliburton.com/en-US/default.html> [Accessed on 28th march 2019].
Inflation rate in US, 2018. Available through: <
https://tradingeconomics.com/united-states/inflation-cpi> [Accessed on 28th march 2019].
The Oil and Gas Situation: In the U.S., Stable and Strong, 2018.Available through: <
https://www.forbes.com/sites/davidblackmon/2018/08/21/the-oil-and-gas-situation-in-the-
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