Halliburton’s Outlook Brightens Despite Modest Results

Oil field services major Halliburton (NYSE:HAL) reported its Q4 2012 earnings on Friday. The firm’s performance was weighed down by the tough market for pressure pumping services and lower land based drilling activity in North America.  However, a strong international performance and better than expected offshore drilling in the U.S. Gulf of Mexico helped the firm partially offset the margin decline. While revenues grew by 3% to around $7.3 billion compared to last year, income from continuing operations fell by almost 35% to around $592 million. ^[1] Although the firm’s results were lackluster compared to last year, they beat market estimates sending the stock up by over 5% in Friday’s trading. Here are the key takeaways from the earnings release and what it could mean for Halliburton going forward.

North American Results Impacted Once Again By Weak Hydraulic Fracturing Market

Like its counterparts Schlumberger (NYSE:SLB) and Baker Hughes (NYSE:BHI) which reported results recently, Halliburton’s North American operations performed poorly, with revenues and margins in the region declining by around 9% and 58%, respectively.

Drilling for oil and gas slowed in North America during the last few weeks of Q4 with the number of oil rigs alone falling by over 5%. Additionally, the oversupply of pressure pumping equipment and weaker natural gas drilling caused pricing for services like hydraulic fracturing to decline significantly. Margins were also squeezed by high costs for guar gum, a raw material used in the fracking process. The firm stocked up on high priced guar gum inventory last year when prices for the commodity hit an all-time high. Now, since the firm continues to consume inventory valued at higher than market costs, it is weighing down the firm’s earnings. The pricing in the pressure pumping market is expected to remain challenging through 2013 and a complete recovery will be contingent on an increase of gas prices and attrition of pumping equipment from the market. The costs for guar could also decrease from Q1 onwards as the firm works through higher cost inventory.  ((Earnings Call Transcripts, Seeking Alpha))

Offshore drilling in the U.S. Gulf of Mexico was strong with business in the region growing by around 37% this year. The firm expects the region to contribute significantly to margin and profit growth in 2013, thanks to market share gains and the commissioning of new deepwater rigs.

International Performance And Growth Opportunities

Among the oil field services firms that we cover, Halliburton derives the smallest portion of its revenues from international operations (around 44%). International revenues grew by 20% while operating income grew by almost 38%. The Middle East/Asia and Latin American operations performed particularly well with business in both regions growing by around 25%. The firm expects global customer spending to grow strongly this year and predicts that its international business growth will outpace the spending levels due to pricing increases, new contracts and new technologies being introduced in international markets. The firm has been focusing on three areas to grow globally: unconventional plays, services for deepwater rigs and production enhancement from mature fields.

Unconventional Plays: Halliburton is recognized as the market leader in services for unconventional plays in North America, the largest market by far for unconventional plays. Globally, unconventional resources are largely under-tapped and provide a promising growth opportunity. Through 2012, the firm expanded its service footprint catering to some of  the first commercial unconventional wells in Australia and China and has also stepped up unconventionals business in other markets like Saudi Arabia, Mexico and Argentina. Progress could be slow, however, as most countries are just in the evaluation phase and are yet to begin full fledged commercial production.

The firm has also been trying to cut costs and boost efficiency of its unconventional plays services. For instance, the firm’s pressure pumping equipment is gradually being transitioned to bi-fuel systems that run on diesel as well as cheaper natural gas. Halliburton has also been deploying ‘PermStim’, a polymer based substitute for guar gum, which could reduce input costs in the fracking process. These improvements should help control costs and improve margins.

Services For Mature Wells: Mature wells account for over 70% of global oil production and demand for production enhancement services for these wells is likely to be strong in the future as higher oil prices justify the relatively high cost of these services. Halliburton has been investing in expanding its capabilities in this technologically under-served market particularly in the areas of artificial lift and chemicals and has seen business for this segment double over the last two years. In Q4, the firm inked a contract with Petronas to boost production from mature wells in the Bayan field, off the coast of Malaysia.

Deepwater And Offshore Drilling: 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. In the last year, the firm has bagged contracts and gained market share in regions like Malaysia, Mozambique, Tanzania, Kenya and Brazil. Strong oil prices are allowing firms to defray the higher costs associated with deepwater explorations and several new build deepwater ships are expected to go online this year, potentially helping business. The deepwater business is however becoming increasingly competitive and higher costs related to regulatory requirements could prove to be two potential risks in this space.

Understand how a company’s products impact its stock price on Trefis

1. Halliburton Press Release [↩]