Halliburton (NYSE:HAL) came out with its Q1 results on Wednesday, reporting a decline in revenues and profitability from Q4 2011 despite higher oil prices this year.  While its revenue and profit figures showed growth over the first quarter of 2011, the changing dynamics in the North American energy markets are likely to impact the company’s profit margins over the next few quarters. Halliburton also took a $300 million charge this quarter to cover possible future expenses and settlements with BP over the Gulf of Mexico spill. Competitors Schlumberger (NYSE:SLB) and Baker Hughes (NYSE:BHI) will be releasing their earnings over the next few days.
We have revised our price estimate for Halliburton to $43, which is about 25% ahead of the current market price.
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Low natural gas prices are forcing a fundamental shift in the North American energy market, with most explorers targeting liquids-rich plays. In the long term, this change bodes well for Halliburton as liquids exploration is a lot more service-intensive, translating into higher revenues for the company. However in the short term, the redeployment of rigs and service crews and the reorganization of the supply chain will affect profit margins. Revenues from the North American market rose slightly to $4.2 billion in the first quarter from $4.1 billion in Q4 2011 while operating profits fell slightly in the same period to $1.06 billion from $1.12 billion.
Profit margins are also under pressure because of rising input costs.  The prices of some key ingredients used in fracturing fluids have increased, resulting in lower margins for the company. One key ingredient, a legume called Gaur, is especially critical as its demand is seen to increase with a shift towards liquids exploration.
While revenues and profits in international markets increased on a year-over-year basis, Halliburton’s revenues declined in almost all international markets compared to Q4 2011 despite rising oil prices. However, in the long term we expect the company to boost revenues as well as profit margins as unconventional exploration and deepwater drilling projects take shape in these geographies.
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