How Will Halliburton’s Over Exposure To North American Markets Impact Its Profits?

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The oil slump that began in the second half of 2014 has severely hit the profitability of the oilfield services companies. A sharp drop in commodity prices resulted in sluggish exploration and drilling demand worldwide, particularly in the North American markets, causing sluggish demand for drilling rigs and other oilfield equipment. Consequently, large oilfield service providers saw a notable decline in their revenue as well as earnings.

Such is the case with Halliburton (NYSE:HAL), the world’s second largest oilfield service provider. The Houston-based company derives more than 55% of its revenue, and in turn more than 50% of its value, from its North American operations. However, due to the commodity downturn, the company’s profits from these markets plunged significantly, creating a dent in its bottom line. In contrast to this, Schlumberger (NYSE:SLB), Halliburton’s closest rival, showed resilience even during the turmoil in the commodity markets due to its limited exposure to the North American markets.

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Due to the persistently low commodity prices, Halliburton’s exposure to North American markets has been reduced from nearly 46% for full year 2015, to less than 40% in the June quarter of 2016. Yet, the company’s presence in the troubled region is much higher than its peers. Since the North American markets were the worst affected by the commodity downturn, this large exposure has weighed on the oilfield service provider’s operating margins, pushing it into net losses over the last couple of quarters.

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That said, Halliburton remains optimistic about its fundamentals and the upside potential of the North American markets. The company believes that the commodity markets have bottomed out and that 900 rigs in this cycle will be equivalent to 2,000 rigs in the last commodity cycle. Thus, we figure that with a gradual recovery in commodity prices, Halliburton’s North American operations will play a crucial role in its future growth and value.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Halliburton Company

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