Halliburton’s Q3 Results Driven By Strong U.S. Completion and Production Activity

Halliburton (NYSE:HAL), the second largest oilfield services provider, published its Q3 earnings on Monday, October 21, reporting a solid set of numbers that beat market estimates. The results were largely driven by higher completion and production-related activity in the North American land market and by more drilling and evaluation work in the Middle East and Asia Pacific. Quarterly revenues grew by around 16% year-over-year to $8.7 billion, while adjusted operating income rose by around 24% to $1.4 billion. ^[1] The company also sought to ease concerns of the impact of falling oil prices on its business, indicating that customers were not slowing down their activity. Separately, the company also increased its quarterly dividend by 20%. Here are some the key takeaways from the company’s earnings release.

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Trefis has a $75 price estimate for Halliburton, which is about 40% ahead of the current market price.

Halliburton’s North American business did well, posting revenues and operating income that were up by around 9% and 15%, respectively, on a sequential basis, outpacing the 3% increase in the U.S. land rig count. The company’s bread-and-butter completions and production segment, which includes its pressure pumping product line, turned out to be the key driver of earnings with revenues rising by 26% year-over-year while margins rose to about 20.6% from around 16.7% a year ago. The market for pressure pumping services has been undergoing a recovery in the United States, driven by higher production from unconventional basins.

The higher demand is also helping to improve pricing. According to PacWest Consulting Partners, the price for fracking services is expected to rise by around 3% this year and by another 7% in 2015. 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. For this quarter, Halliburton indicated that completion volumes per well have risen by over 50% year-over-year. We expect the strong trend in completion and production activity to continue, given that U.S. oil production recently hit a 28-year high of around 8.7 million barrels per day and output is projected to rise by another 1 million barrels per day in 2015. Additionally, horizontal drilling activity – which is typically a leading indicator  of fracking – has increased by about 22% year-over-year during Q3.

Company Does Not Foresee A Pullback in Upstream Activity

Brent crude, the global benchmark for crude oil, has declined by over 20% over the last 4 months owing to concerns of slowing consumption growth, strong supply from U.S. shale oil fields and a recovery in production in Libya. The current pricing environment has been weighing significantly on the stock prices of most oilfield services firms, amid concerns that exploration and production activity and upstream capex spending could take a hit if oil and gas companies face revenue pressures. Halliburton’s stock has been particularly badly impacted, falling by about 25% over the past 3 months. However, Halliburton’s management has said that there weren’t any indications that activity was slowing down. The company also added that it believed that the fundamental indicators in the oil market imply that the lower prices may not be sustainable. The company’s comments mirror those of Baker Hughes and Schlumberger, which reported earnings last week. ^[2] However, if oil prices were to decline further, we believe that Halliburton could be impacted more than the other large oilfield services companies that we cover. The company derives a greater share of its revenues from areas such as shale and tight oil – which typically have shorter project lead times and  higher per-barrel production costs, and these activities could see a pullback in a sustained low pricing environment.

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1. Halliburton Q3 2014 Earnings Press Release [↩]
2. UPDATE 2-Halliburton sees no slowdown in drilling despite crude slide, Reuters, October 2014 [↩]