Pressure Pumping Business Could Aid Halliburton’s Q3

Halliburton (NYSE:HAL), the world’s second largest oilfield services company, is expected to publish its Q3 2014 results on Monday, October 20. We expect the company’s earnings to improve on a year-on-year basis, driven primarily by stronger rig activity and better demand for production services in North America. Over the last quarter, the land-based rig count in the U.S. rose by about 3% sequentially to touch a two year high of 1,869, while the well count also improved by around 5% year-over-year. ^[1] Crude oil production in the United States has also been trending upwards, owing to higher production from the Bakken and Eagle Ford shales. During Q2, the company’s quarterly revenues beat market estimates,  growing by around 10% year-over-year to over $8 billion, while earnings met expectations, with operating margins growing from around 13.4% to around 14.8%. Here is a brief overview of what to expect when the company publishes earnings Monday.

Trefis has a $75 price estimate for Halliburton, which is about 50% ahead of the current market price.

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Better Pricing Could Drive North American Margins

For Q3, Halliburton expects revenue growth in North America to outpace the growth in the rig count, while it also expects operating margins to rise to about 20% from around 18% during the previous quarter. Much of the improvement could come from a recovery in the market for pressure pumping, which is the company’s single-largest product line. Horizontal drilling activity – which is typically a precursor to pumping activities such as fracking – has been trending higher due to increasing unconventional exploration in regions such as the Permian Basin. The horizontal rig count grew by around 22% year-over-year during Q3, which is likely to have contributed to better demand for fracking, helping to absorb excess capacity. The service intensity for pumping jobs has also been increasing, given that operators have been drilling longer lateral sections of wells, while the stage count for fracking operations has also been rising. Halliburton previously indicated that its count was up by 20% year-over-year. The tightening supply-demand balance should result in better pricing and margins for Halliburton’s pumping business. While the company does not break out the results for its pressure pumping product line, we should be able to get a sense of pricing by looking at the margins for its North American Completion and Production product segment.

Falling Crude Oil Prices Could Impact Long-Term Earnings

Oil prices have plummeted over the past few weeks, impacted by increasing output from U.S. shale fields, a recovery in oil production in Libya and higher supply from Saudi Arabia. There have been concerns on the demand side as well, given the tepid global economic outlook and sluggish forecasts for oil consumption growth. Brent crude prices declined to around $88 recently – their lowest levels since December 2010, while WTI prices have also been at sub-$85 levels. Although the current crude oil pricing environment has resulted in a 28% decline in Halliburton’s stock price over the last three months, we do not see a significant near-term earnings impact, given that the company operates largely based on contracts. However, if oil prices remain under pressure, at levels of $80 or below for an extended period, we believe that oil and gas companies could begin to rethink their upstream capital spending plans, scaling back on expensive plays such as ultra-deepwater and unconventionals. This could in turn reduce demand for Halliburton’s most technically sophisticated and lucrative offerings, impacting earnings over the longer term.

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