Halliburton Has Good Q2, Will Expand Pressure Pumping Fleet

Halliburton (NYSE:HAL), the world’s second largest oilfield services provider, posted a strong set of Q2 2014 results on July 21, meeting market expectations on earnings while beating revenue estimates. Quarterly revenues grew by around 10% year-over-year to around $8.05 billion, while operating margins grew from around 13.4% to around 14.8%. ^[1] On a year-over-year basis,  the company’s results were driven by higher activity in the U.S. land market and stronger upstream activity in the Eastern Hemisphere, although this was partially offset by lower business in Latin America. The company seems bullish on its future prospects, strengthening its shareholder distribution program by adding around $4.8 billion in stock repurchase authorizations. Additionally, demand for pressure pumping (the company’s single largest product line) has seen a meaningful uptick in the United States and this could prove to be a key driver of earnings going forward. In this note, we take a look at some of the current trends impacting the pressure pumping business.

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Pressure Pumping Market Approaches Equilibrium

Halliburton’s North American revenues grew by around 14.2% year-over-year to around $4.34 billion, while operating margins grew from around 17.5% a year ago to around 18.2%. Higher land-based activity (the onshore rig count was up 5% year-over-year) and an ongoing recovery in the  pressure pumping markets were key drivers of the results. The pumping product line, which accounts for about one-third of  Halliburton’s revenues, had been facing headwinds over the last two years, owing to low natural gas prices and excess equipment in the market. However, the market has been improving of late, driven by higher unconventional drilling activity in regions such as the Permian basin and higher service intensities for fracking jobs (Halliburton says its stage counts are up by around 20% year-over-year).

This has contributed to significant absorption of capacity and the company now estimates that the percentage of excess horsepower in the market has declined to below 10%, reaching a point where new horsepower may be needed to meet future demand.((Halliburton’s (HAL) CEO Dave Lesar on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 2014)) Halliburton also noted that it has been seeing some pricing improvements on its new pressure pumping contracts, as it passes on the higher costs related to fuel, transportation and labor to its customers. Pricing is likely to see a further uptick going forward as demand and supply reach an equilibrium. According to PacWest consulting partners, prices for pumping services could rise by around 2% and 4%, respectively, in 2014 and 2015.

Halliburton Will Add New Fracking Fleets This Year

Halliburton is likely to be the biggest beneficiary of the improving fracking market,  given the scale of its operations and its technological edge. In order to meet the rising demand, the company intends to expand its fracking fleet, with new crews available for service towards the end of this year. ^[2] The expansion will increase the company’s planned capex for this year from around $3 billion to around $3.3 billion. The company will be deploying its Q10 series pumps with its new fleets. These pumps should help to improve the efficiency and economics of fracking operations, since they deliver higher flow rates (about 20% higher) to customers while also cutting down operating and maintenance costs by around 50% when compared to legacy pumps. ^[2] Overall, the company expects to see further improvements in its North American operations through Q3. Revenue growth from the region is projected to outpace the growth in the rig count, while operating margins are expected to come in at around 20%.

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1. Halliburton Q2 2014 Earnings Press Release, Halliburton, July 2014 [↩]
2. Halliburton Names New President, Profit Rises 20%, WSJ, July 2014 [↩] [↩]