Halliburton’s Q3 Results Lifted By Strong Activity In The Eastern Hemisphere

Halliburton (NYSE:HAL), the world’s second largest oilfield services company, reported an encouraging set of third quarter numbers on October 21. While the results were aided by strong upstream activity in the Eastern Hemisphere, the company’s North American operations continued to face some pricing headwinds although this was offset by better efficiencies and rising offshore drilling . Quarterly revenues grew 2% year-over-year to around $7.5 billion while operating profits rose 13% to around $1.1 billion. Company-wide operating margins improved by around 1.5% over the last year to 15%. ^[1] In this note, we take a brief look at some of the factors that influenced Halliburton’s earnings and what to expect going forward.

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Much like its rivals, Halliburton made good on the rising upstream activity as its international revenues grew by over 14% year-over-year to $3.6 billion while operating margins rose by close to 2% to 15.5%. The company’s Europe/Africa/CIS division did particularly well owing to improved cementing and Boots & Coots well control activity in Russia, higher drilling and cementing activity in the North Sea and higher tool sales in Angola. ^[2]

The North Sea, which is one of the largest offshore drilling markets in the world has seen activity rise this year. The average rig count during the third quarter grew to around 43 from around 38 during Q3 2012. Halliburton should see its business in the region grow further as it was recently awarded contracts by Norway’s Statoil to provide drilling and completion fluids, cementing, stimulation as well as waste management services. These contracts, which will initially be for period of three years with a possibility of extension, will help the company significantly increase its market share in the country. The company has also been making progress in Angola’s pre-salt deepwater frontier, particularly in the areas of testing and subsea services. The company has won several contracts to provide a complete suite of testing services as well as subsea services that are scheduled to begin from 2014, and these could give the company a solid footing in this growing offshore drilling market.

North America Witnesses An Improvement Over Last Year, But Pricing Remains Tough

Halliburton’s business in North America continued to face some headwinds due to downward pricing pressures particularly for services such as pressure pumping. Revenues from the region were down by around 1.5%  year-over-year to about $3.9 billion, while operating margins improved by close to 3% year-over-year to about 17%, although they declined slightly on a sequential basis.

Over the past few quarters, most large oilfield services companies have been facing headwinds in North America due to subdued drilling activity across shale gas basins as well as an oversupply of pressure pumping equipment, which is used for hydraulic fracturing of shale gas and oil wells. Halliburton has been particularly vulnerable since it derives nearly 40% of its global revenues from the pressure pumping product line. ^[3] The North American Completion and Production segment, which holds most of the pumping assets, reported quarterly operating margins of around 17% versus about 18% in the last quarter and around 13% last year. Much of the margin improvement over the last year has come from improving efficiencies as well as an increasing number of fracking stages that are performed for each well. The company has indicated that it has seen the stage count per well rise by around 15% to 20% over the last year in the Marcellus and Eagle ford shales. While margins for Completion and Production segment could rise going forward, on the back of improving efficiencies, pricing is expected to remain challenging since the pressure pumping market is still oversupplied by around 20%. ((Seeking Alpha))

Business in the Gulf of Mexico continued to grow as the rig count in the region is up by close to 20% over the last year, although there were some delays and maintenance related slowdowns in the region. However, the outlook looks good since there has been a broader shift from drilling to completion activity, and this could benefit Halliburton given its strength in the completions and production space. The company has been expanding its presence in the Gulf and recently added an intervention vessel and a stimulation vessel to its fleet in the region.

We are in the process of updating our model and price estimate for Halliburton to account for the earnings release.

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1. Halliburton Press Release [↩]
2. Seeking Alpha [↩]
3. Howard Weil [↩]