Yesterday, Petroleos Mexicanos (also known as Pemex), Mexico’s state oil company, said that it has awarded a contract to Houston-based oilfield service provider – Halliburton Company (HAL) – to drill 170 wells at the large Chicontepec oil basin. 

Pemex said that the deal, worth approximately $159 million, will last three years and involve four drilling rigs. Halliburton is expected to commence work on the Chicontopec fields (in northern Mexico) from the next month. This will mark the oilfield services giant’s debut in an area where its competitors Schlumberger Limited (SLB) and Weatherford International (WFT) already have an established presence. 

At a time when Halliburton, the world’s second-largest oilfield-services company by revenue, is reeling from its heavy exposure to the natural gas-centric North American market, the Pemex contract allows the company to expand its international presence. Mexico is an important market for all oil service companies and we expect the deal to generate a sizeable portion of Halliburton’s Latin America revenue in the near to medium term. 

The Chicontepec basin, situated in northern Mexico, has a tricky geology with expensive-to-produce pockets of oil on land. Since the rock formations holding the oil have low pressure and flow rates, extraction becomes difficult. This provides opportunities to companies such as Halliburton, which markets advanced drilling products and techniques to maximize production at difficult formations. 

The deal with Pemex also highlights Halliburton’s strong relationships with state-owned oil companies, which have been relatively less affected by the current economic and credit crisis. 

We view this contract as a positive for Halliburton in a gloomy economic environment. Even so, going by the company’s grim outlook for the North American pressure pumping market (accounting for over 1/3rd of the company’s sales), we believe that Halliburton’s revenue and earnings will continue to be weak in the coming quarters. As such, we maintain our Sell recommendation on this large-cap diversified oilfield service name.
Read the full analyst report on “HAL”
Read the full analyst report on “SLB”
Read the full analyst report on “WFT”
Zacks Investment Research

Last 5 posts by Zacks Market Commentaries

• Citi Trends' Profit Rises - Analyst Blog - November 24th, 2009
• H-P Revenue Down, EPS In-Line - Analyst Blog - November 24th, 2009
• Zacks Bull and Bear of the Day Highlights: Petrobras, St. Jude Medical, Motorola Inc., Sprint Nextel Corp. and Alcatel-Lucent - Press Releases - November 24th, 2009
• Zacks Analyst Blog Highlights: Skyworks Solutions, Ericsson, Alcatel-Lucent, Nokia and Siemens - Press Releases - November 24th, 2009
• Zacks #5 Rank Additions for Tuesday - Zacks Tale of the Tape - November 24th, 2009