Halliburton Earnings Preview: Low Gas Prices & Rising Costs To Sink Margins

HAL: Halliburton logo

Halliburton (NYSE:HAL) is set to declare its Q2 earnings on July 23. Earlier, the company had warned that its margins could deteriorate because of rising raw material costs. (See: Halliburton Warns On Higher Fracking Costs) Oilfield services providers have been hit by the rising cost of gaur, which is used in the preparation of fracking fluid. The industry has also been impacted by lower exploration in natural gas plays because of a sharp drop in the commodity’s price in the U.S. market. These two factors could result in a drop in the company’s operating margins for Q2 as well as a drop in its earnings in 2012.

We will revisit our $43 price estimate for Halliburton, which is at a 45% premium to the current market price, post the earnings results.

Click here for our full analysis of Halliburton.

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Pricing issues

In the last quarter, a weak winter and an oversupply situation resulted in the price of natural gas falling to its lowest levels over the past decade. Low prices forced producers to shift to oil rich shale plays such as the Bakken Shale in North Dakota. Oilfield services providers responded by shifting equipment and crews to the new geographies, resulting in lower operational efficiencies in Q1. However, the concentration of industry capacity in oil rich plays is resulting in lower pricing levels in the pressure pumping segment within the industry.

The situation has been complicated due to higher raw material costs as Halliburton and its competitors are finding it difficult to push these costs to explorers in the present market. Halliburton’s exposure to North America means that the company could be disproportionately impacted by the market trends. However, a revival in Gulf of Mexico activity could prop up results from this geography.

International market

Halliburton’s performance in international markets has remained steady during the quarter. The international rig count published by Baker Hughes for May increased from 1,151 last year to 1,225. [1] Despite a drop in oil prices in international markets during this period, the rig count has seen growth in most geographies.

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  1. Baker Hughes Rig Count, Baker Hughes []