Halliburton Q1 Preview: Three Trends Driving The North American Business

Oilfield services major Halliburton (NYSE:HAL) will publish its Q1 2014 earnings on Monday, April 21. We expect the company’s quarterly results to increase on a year-over-year basis, driven by higher capital spending by oil and gas companies as well as possibly better efficiencies and margins for the company’s pressure pumping product line. During Q4 2013, Halliburton’s quarterly revenues grew by around 4% year-over-year to $7.6 billion, while operating margins rose to about 15% compared to around 13.5% a year ago. In this note, we take a look at some of the factors that could influence the company’s performance in North America, which is its largest market.

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Trefis has a $53 price estimate for Halliburton, which is slightly below the current market price.

Upstream Spending Growth: Oil companies are expected to bolster their exploration and production spending in North America this year, driven by stable oil prices as well as a recovering economy. Spending is expected to rise by as much as 7% to around $156 billion in 2014, as compared to growth of just about 2% in 2013. ^[1] The spending growth will translate to better demand for services provided by oilfield services companies such as Halliburton. According to data from Baker Hughes, the total land based well count in the United States rose by about 3.7% year-over-year during Q1, while the offshore rig count in the U.S. Gulf of Mexico has risen from 50 rigs in Q1 2013 to about 54 in Q1 2014.

Shift To Unconventional Plays: More exploration and production activity is being directed towards unconventional hydrocarbon reserves. The horizontal rig count, which is potentially an indicator of demand for unconventional services, is up by around 5% year-over-year in the United States. Traditionally conventional basins such as the Permian have also been seeing a surge in horizontal drilling (see Why The Shift To Unconventionals In The Permian Will Help Oilfield Services Companies). This should be positive for services companies since unconventional wells are more expensive to drill and complete, and likely have better margins. For example, the average shale well in the Permian basin is estimated to cost over $5 million to drill and complete; in comparison, conventional oil wells can cost as little as $1 million. ^[2]

Efficiency Improvements Could Help Margins: Halliburton’s North American operating margins have been steadily improving over the last few quarters, rising from around 12.3% in Q4 2012 to around 16.8% in Q4 2013. The trend could continue, with the company forecasting a 200 basis point increase in margins by the end of this year. ^[3] Some of the factors that could drive a margin expansion include improving well-site efficiencies and improvements to the pressure pumping product line (which is Halliburton’s single most important business in the U.S.). More operators have been using pad-based drilling to spud multiple wells using a single pad. This helps to co-locate wells and brings better centralization of facilities, allowing for better cost management for oilfield companies. On the pressure pumping front, Halliburton has been undertaking initiatives such as its “Frac of the Future” and “Battle Red” initiatives which are focused around improving processes and reducing the costs of fracking.

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1. Barclays’ Global 2014 E&P Spending Outlook, PennEnergy, December 2014 [↩]
2. The Permian basin adds to U.S. shale bounty, Financial Post, December 2013 [↩]
3. Halliburton Q4 2013 Earnings Call Transcript, Seeking Alpha, January 2014 [↩]