Halliburton (NYSE:HAL) released its third quarter earnings yesterday, reporting a 2% sequential drop in revenues and an 18% drop in operating income. A falling gas rig count, inclement weather and pricing pressures in North America were largely responsible for the sub-par performance. However, the company’s international operations continued to perform well despite macroeconomic headwinds led by strong growth in Latin America, Middle East and Asia. North American revenues were down 5% since the last quarter while international revenues grew by about 2%. 
We are in the process of updating our $43 price estimate for Halliburton following the earnings release.
North American Market Continues To Be Sluggish
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North American operations, which account for more than half the company’s Trefis valuation, saw operating income fall by 30% sequentially. Given low natural gas prices, fracking capacity continues to migrate from gas plays to oil basins which require lower stimulation horsepower. The company also expects to continue facing cost pressures due to high guar gum costs. Although guar prices have been falling over the last quarter, the company continues to work through higher priced inventory impacting costs. These costs are expected to subside in the next year as the company takes delivery of lower priced inventory. 
The slower than expected seasonal recovery in Canada also weighed in on the company’s performance. Rig count in the country was down by around 26% since last year and the outlook for the rest of the year remains tepid. Operations in the Gulf of Mexico continue to be a bright spot despite activity disruptions caused by the Hurricane Isaac. The outlook is positive for the next quarter due to contracts for the new deepwater rigs arriving in the region.
Overall, the company expects the next quarter to continue to be challenging for its North American operations, as customers continue to hold back on spending due to constrained capital budgets, and expectations of increased holiday downtime.
Strong Performance In The Eastern Hemisphere Boosts International Results
The results of the company’s international operations were encouraging in spite of the decline in the international rig count during the quarter. The performance in the Eastern Hemisphere was particularly noteworthy with revenues and operating income growing by 19% and 70% respectively YoY, thanks to an increase in drilling and completion services for shale gas wells in China and Australia and upbeat E&P activity in Iraq and certain other regions in the Middle East.
The company’s Latin American operations also posted good results due to increasing activity in unconventional fields and new contracts in Brazil, Argentina and Columbia. Performance in Europe/Africa/CIS was muted with a marginal decline in revenues and operating profits due to reduced activity in continental Europe and shutdowns in Angola due to general elections. The company reported progress in its deepwater business winning contracts in Kenya and East Africa.
Halliburton expects to continue its strong performance in international markets as work commences on new contracts, price increases are realized and as new technologies are deployed into these markets. We believe that margins could also be bolstered by the company’s increasing focus on global unconventional plays and deepwater exploration.Notes: