Halliburton Q1: Eastern Hemisphere Shines; North American Recovery Underway

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Oilfield services major Halliburton (NYSE:HAL) reported a strong set of Q1 2014 earnings on April 21, driven by robust exploration and production activity in the Eastern Hemisphere. While the company’s quarterly revenues rose by around 5% year-over-year to about $7.35 billion, adjusted operating income grew to about 7.5% to $970 million. [1] Halliburton’s outlook for the rest of the year was also relatively upbeat, with the company guiding a 25% sequential growth in earnings for Q2. Below, we take a look at some of the factors that influenced Halliburton’s quarterly numbers and what to expect from the company in the near term.

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Eastern Hemisphere Continues To Power Earnings

The Eastern Hemisphere, which includes the Middle East/Asia and Europe/Africa/CIS geomarkets, has proved to be a key earnings driver for most large oilfield service companies over the last few quarters. During Q1, Halliburton’s revenues from the region rose by about 11% year-over-year to around $2.58 billion, while operating margins rose by around 50 basis points to about 13.80%.

Revenues from Saudi Arabia, which is one of Halliburton’s most important markets within the Eastern Hemisphere, grew by roughly 50% year-over-year during Q1, [2] driven by higher integrated project activity and the company’s expansion into the country’s unconventional gas market. Although the market for unconventional plays such as shale gas is still in its early stages in Saudi Arabia, it could prove to be a key growth area for Halliburton, given its vast experience in providing services for unconventional plays in the United States.

Halliburton also saw its business grow in the Europe, Africa, CIS geomarket, driven by increased drilling and wireline activity in Angola as well as due to higher activity in the United Kingdom, the Netherlands and Algeria (see A Look At Angola’s Pre-Salt Oilfield Services Market). The company expects growth in the Eastern Hemisphere to continue to be strong through this year, estimating that revenues from the region would grow by over 10% year-over-year while margins are expected to be in the “upper teens.”

Pumping Improvements Will Pave The Way For North American Recovery

Halliburton’s North American operations account for over half of the company’s total revenues. During Q1, revenues from the segment grew by around 5% year-over-year to about $3.9 billion, although margins contracted by about 1% to around 15.4%, due to lower prices for pumping services as well as some weather and logistical issues. However, the company expects North American margins to improve through the second half of this year, owing to a higher level of confidence among oil and gas companies, who have been boosting their exploration spending on the back of supportive commodity prices.

Halliburton could also benefit from a recovery in the market for pressure pumping services, which had been impacted by an oversupply of horsepower and stiff competition from smaller companies. Halliburton indicated that the excess horsepower in the market has been tightening much faster than expected due to higher service intensities as well as due to growth in unconventional drilling activity in the Permian basin. Activity in the Permian basin, which is one of the largest oil producing regions in the United States, had been typically focused on conventional hydrocarbon resources. However, there has been an increasing shift towards unconventional activity in the basin of late, with the horizontal rig count as a percentage of the total rig count in the region recently crossing the 50% mark. This could bode well for Halliburton, since it is the largest provider of services such as fracking in the United States (see Why The Shift To Unconventionals In The Permian Will Help Oilfield Services Companies).

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Notes:
  1. Halliburton Q1 2014 Press Release, Halliburton, April 2014 []
  2. Halliburton Q1 2014 Earnings Call Transcript, Seeking Alpha, April 2014 []