Halliburton (NYSE:HAL), the world’s second largest oil field services firm, will release its Q1 2013 earnings on April 22. Over the last year, the company’s performance has been impacted by weak North American land-based drilling and higher raw material costs while being offset by a better international performance and a stronger performance in the U.S. offshore market. In Q4, Halliburton’s revenues grew by 3% to around $7.3 billion year-over-year while income from continuing operations fell by almost 35% to around $592 million. In Q1, we expect results to be weighed down by North America yet again since natural gas drilling activity has dropped to its 14-year lows, causing weaker pricing for gas directed services. The firm is also expected to record a $30 million charge related to foreign exchange losses in Venezuela.
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Fracking Market Remains Weak
Among the oilfield services companies we cover, Halliburton has the greatest exposure to the North American market, which accounts for around 56% of its revenues. Drilling activity in North America has been sluggish for some time now as low gas prices has caused gas directed activity to plummet from around 726 active rigs (both the U.S. and Canada) to around 464 active rigs over the past year. Halliburton is the world’s largest provider of pressure pumping services which are primarily used for fracking shale gas and oil wells. The decline in gas drilling and an expansion in pumping capacity across North America in recent years have resulted in an oversupply of equipment, driving down prices for the service. Even though oil directed drilling has increased from around 1,437 to 1,474 rigs, it hasn’t been enough to offset the gas drilling plunge since pumping oil wells requires less capacity than gas wells. Pressure pumping accounts for around 45% of Halliburton’s business. 
While U.S. natural gas prices have recovered by about 20% over the last quarter to levels of around $4 per mmBtu, it hasn’t stopped the declining rig count since companies are able to meet most of their production needs from existing wells. However, if gas prices continue their uptrend and demand grows stronger, we could see a reversal in the declining gas rig count.
Lower Guar Gum Costs And Operational Improvements Can Help Margins
While weaker pricing is expected to weigh in on the results, the company has been improving its operational efficiency due to 24-hour operations, advancements in drilling and completion technologies, and the growing adoption of pad-drilling technologies. Another positive factor could be the lower raw material costs. The prices of guar gum, which is used for fracking, increased from around US$156 per 100 kilogram in March 2011 to over $1,400 by March 2012 due to supply constraints, causing oilfield service firms to stock up on the raw material early last year in anticipation that prices would rise.  However, prices fell which led to most firms consuming out of inventory that was above market cost over much of last year. The firm mentioned in its Q4 conference call that it had just a month’s worth of high priced guar inventory to be consumed in Q1 and this should help boost margins relative to last year. 
International Business: Unconventional Plays And One-Time Forex Charges
Halliburton is recognized as the market leader in services for unconventional plays in North America. The international market for unconventional plays on the other hand is still largely undertapped and provides a promising growth opportunity for the company. 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 unconventional plays business in other markets like Saudi Arabia, Mexico and Argentina. We will watch the firm’s progress in continuing this expansion, but we do not expect the progress to be rapid since most countries are only drilling exploratory wells and full scale commercial production could take time. We think its important that the firm continues to bag more early stage contracts in order to build relationships and scale up over the long run.
Halliburton is expected to take a one-time foreign exchange related charge of $30 million for its operations in Venezuela. The country recently devalued its currency from around 4.3 bolívar per dollar to around 6.3 bolívar per dollar in a move to improve the government’s finances.
We have a $48 price estimate for Halliburton, which is a 15% premium over its current market price.Notes: