Halliburton Preview: Watching The North American Completion and Production Business

by Trefis Team
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Halliburton Company
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Halliburton (NYSE:HAL) is expected to release its Q3 2013 earnings on October 21. While we expect the company’s quarterly results to be bolstered by reasonably strong global exploration and production activity as well as some efficiency improvements, we will be closely watching its performance in North America, where its Completion and Production business has been facing some headwinds of late.

Trefis has a $50 price estimate for Halliburton, in line with the current market price.

All Eyes On North American Completion and Production Margins

Over the past year, many large oilfield services companies have been facing margin pressures in North America due to weaker drilling activity across shale gas basins and oversupply of pressure pumping equipment, which is used for hydraulic fracturing of shale oil and gas wells.  Halliburton has been particularly vulnerable since it derives close to 40% of its global revenues from the pressure pumping product line. [1] While the company doesn’t provide a breakdown of the financials of its pressure pumping operations, the North American Completion and Production segment, which holds most of the pumping assets, has seen its operating margins fall to about 17% over the first six months of this year from close to 25% last year. [2] We believe that there could be a slight improvement in these margins this quarter thanks to improving fracking efficiencies and higher service intensity although continued pricing pressures could prove a mitigating factor.

See Our Complete Analysis For Halliburton Here

Efficiency Improvements For The Fracking Fleet: Halliburton has been executing on its “Frac of the future” initiative. Under this program, the company has been fitting its fracking fleet with more efficient equipment, including pumps that can operate on natural gas instead of diesel and gravity and solar-powered sand pumps. Besides this, Halliburton has also been operating a larger portion of its fracking fleet on 24-hour shifts. These initiatives are expected to reduce labor and operational costs for the fracking fleet and should also help reduce maintenance costs.

Increasing Stage Count And Well Count Could Help Demand: Although the overall third quarter rig count in North America has witnessed a slight decline compared to last year, drilling efficiencies and service intensity are likely to have improved in many basins. The adoption of pad drilling has meant that oil and gas companies are able to cut down on their drilling cycle times; drilling more wells using a single rig. Additionally, the number of fracking stages per well has also been rising in some basins. For instance, Halliburton mentioned that it had been performing as many as 40 stages per lateral in certain zones of the Marcellus shale during the second quarter. [3] Companies have typically reported under 20 stages per well in the past and we believe that this increasing intensity could bode well for demand. [4]

Pricing Will Prove To Be A Concern: North America has over 16 million hydraulic horsepower (HHP) of pressure pumping capacity and as of the first quarter of this year capacity utilization stood at just about 76%. [5] While utilization is likely to have seen some improvement over the last two quarters, there is still expected to be a significant amount on underutilized capacity in the market. Halliburton has mentioned that pricing for pumping could remain under pressure though for the rest of this year.

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Notes:
  1. Howard Weil []
  2. Form 10-Q []
  3. Seeking Alpha []
  4. Drilling Info []
  5. PacWest Consulting Partners Press Release []
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