Halliburton (NYSE:HAL), the world’s second largest oil field services provider, is expected to release Q4 earnings on January 25. In Q3, the firm reported a 2% sequential drop in revenues and an 18% drop in operating income, primarily due to weak drilling in North America and an oversupplied pressure pumping market. For this quarter, we expect to see a marginally better performance from the firm, thanks to an increase in offshore drilling in the U.S. Gulf of Mexico and new contracts and price revisions in the international space.
Here’s what to expect and what we will be watching when the firm releases earnings Friday.
North American Offshore Could Offset Gas Drilling Decline
Halliburton’s business is heavily dependent on the North American market. In 2011, the firm derived almost 58% of its revenues from the region, which accounts for about 60% of its Trefis price estimate. We expect the region to turn out a marginally better performance this quarter.
Weak Gas Drilling Will Continue To Weigh Down Results: Of late, the U.S. oil field services sector has been impacted by weak natural gas pricing, which has taken its toll on companies that offer pressure pumping services. In the previous quarter, the firm’s North American operating income fell by around 30% sequentially due to this. While gas prices have seen a recovery of sorts in the second half of the year with prices rising from under $2/million BTU in April 2012 to current levels of around $3.4/million BTU, the gas rig count has not shown much of an uptick in the same period as oil and gas companies are able to maintain output without investing in new wells. (See Also: The North American Drilling Landscape And Where It’s Headed In 2013)
Growth in U.S. Offshore Drilling Could Offset Weak Land Performance: In the last quarter, most drillers, including Halliburton, suffered setbacks due to weather related issues in the Gulf of Mexico (GoM). However we expect things to be much better on the offshore front this quarter as the firm has bagged new contracts in the region and firm oil prices have stimulated interest in offshore drilling. Through the year, the offshore rig count in North America has grown by around 22%, and this year has seen the highest number of drilling permits issued in the GoM since 2007. Providing services to offshore and particularly deepwater rigs is beneficial to Halliburton since they command better rates and also provide scope to offer integrated solutions to oil and gas companies. We believe that strong offshore drilling could help the firm boost its North American revenues and margins sequentially.
The firm has a much smaller presence in the international space compared to rivals like Schlumberger (NYSE: SLB). Schlumberger derives around 70% of its revenues from outside North America while Halliburton derives around 40%. However, we believe that there are pockets of growth which the firm could leverage such as mature fields and global unconventional plays. We will be tracking the firms progress in these two areas.
Mature Fields: Mature wells account for over 70% of global oil production. Halliburton has been investing in expanding its capabilities in this technologically under-served market. In Q4 the firm inked a contract with Petronas to help boost production from mature wells in the Bayan field, off the coast of Malaysia. Production enhancement services are generally quite expensive, but are likely to be justified with increasing oil prices. (See Also: Halliburton Can Profit From Malaysia’s Mature Fields)
Global Unconventional Plays: While the firm has a strong presence in unconventional plays in the U.S., like most oil field service firms, its presence in international unconventional plays remains quite limited. For instance, Halliburton estimates that countries outside North America hold more than 80% of the world’s shale gas reserves, but under 20% of the pressure pumping capacity that is required to extract it. Countries like China have recently conducted auctions for shale gas blocks. Given that most of these countries don’t have the expertise required for developing these reserves, firms like Halliburton could play an instrumental role in providing the requisite technology and services.