Halliburton Earnings Fall But U.S. Fracking Outlook Improves

Halliburton (NYSE:HAL), the world’s second largest oilfield services company, released its Q2 earnings on July 22, displaying a mixed set of numbers. Much like its peers, Schlumberger (NYSE:SLB) and Baker Hughes (NYSE:BHI) which released earnings last week, the company’s North American operations continued to face headwinds although international operations performed well driven by strong activity in the Middle East and Asia. While revenues remained flat year-over-year at around $7.3 billion, operating income fell by around 13% to $1.04 billion. ^[1] In this article we examine some of the factors that influenced Halliburton’s performance in North America, its single largest geographic market.

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North America Remains Sluggish, But Higher Efficiencies Will Alleviate Short Term Pressures

Pressure pumping is used in hydraulic fracturing for shale gas wells and is Halliburton’s most important product line. We estimate that it accounts for more than 50% of the company’s business in North America. The market for pressure pumping services has taken a hit in the United States over the last few quarters, as an oversupply of pumping horsepower coupled with weaker demand from shale gas basins lowered utilization rates and pricing. On a year-over-year basis, Halliburton’s revenues from North America fell by around 8% to $3.8 billion while operating income fell by nearly 22% to $666 million. However, results improved sequentially with operating income growing by nearly 20% since Q1 2013.

Given the company’s large exposure to the fracking space, it has been focusing on improving efficiencies, introducing new processes and new technologies across the product line. For instance, Halliburton has been rolling out its “Frac of the future” program to cut down on both capital and operational costs for fracking wells. Under the program the firm will fit its fracking fleet new equipment such as efficient pumps that can operate on natural gas instead of diesel and gravity, and solar-powered sand pumps. These new deployments are expected to cut down on maintenance costs and also reduce labor and operational costs. The higher efficiency is likely to help the company reduce the amount of equipment needed on location by an average of 25%, decreasing the costs of delivering  the frac fleet. The firm has already transitioned around 10% of its fleet to this new setup and expects the number to grow to about 20% by the end of this year. ^[2] The firm also mentioned that the service intensity was increasing on many of its fracking operations, meaning that more number of frac stages were required for each well.

The company’s performance in the  U.S. Gulf of Mexico turned out to be relatively subdued compared to its peers since the certification of blow out preventers (BOP) on some offshore rigs delayed several of the firm’s large completion jobs. The company expects the region to perform better during the second half of the year as these delayed contracts are executed as well as due to an  increasing number of rigs that are transitioning from exploratory drilling to development and completions.

The firm has been deploying new and more differentiated technologies in the Gulf. For example, during the last quarter the company introduced an enhanced single-trip multi-zone stimulation for some of its customers in the Gulf. This stimulation technology will potentially save operators weeks of rig time and should help to improve the economics of ultra-deepwater wells.

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1. Halliburton SEC Filings [↩]
2. Seeking Alpha [↩]