Halliburton Q4 Preview: North American Completions and Production Could Drive Earnings

Halliburton (NYSE:HAL), is expected to publish its Q4 2014 earnings on January 20, reporting on a challenging quarter for the broader oil and gas sector that saw benchmark crude oil prices decline by around 40%. We do not expect the weakness in the oil markets to have impacted Halliburton’s Q4 earnings, since upstream activity typically responds to sharp oil prices declines with a delay, given the contract-driven nature of oilfield services. We expect the company to post year-over-year earnings growth for Q4, driven largely by the performance of the North American completions and production segment. That said, we believe that the near-to-medium term outlook for the company could be challenging, as both integrated and independent oil companies look to slash their upstream capex in light of weaker cash flows and returns. Here’s a brief look at what to expect when Halliburton reports earnings Wednesday.

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Trefis has a $60 price estimate for Halliburton, which is significantly ahead of the current market price. We will be revising our valuation model and price estimate for the company following its earnings release.

Earnings Could Be Aided By Higher Unconventional Activity In North America

Halliburton’s North American business has been a key growth driver over the past year, with revenues and earnings from the geomarket outpacing the growth in the broader North American rig count. We expect this trend to have continued into Q4, given that oilfield services activity in the U.S. remained strong with Baker Hughes reporting that a total of 9,544 onshore wells were drilled in the country, marking a 5% year-over-year increase. The average rotary rig count had also risen by 8% year-over-year driven by higher horizontal drilling in regions such as the Permian basin. This should bode well for the company’s completions and production segment, which includes its pressure pumping product line. Halliburton has also been reporting higher service intensities for its pressure pumping operations. For instance, during Q3, the company noted that the stage count per well was up by more than 30% year-over-year, meaning that a greater number of segments along each lateral section were being hydraulically fractured to extract oil and gas. The company has also indicated that the average amount of sand per well increased by more than 50% year-over-year during Q3. ^[1]  Halliburton could also see some improvement on the international front. In the Latin American geomarket, results could be aided by year-end software and product sales and a ramp up of integrated project management and asset management projects in Mexico. The Middle East Asia segment could also see an improvement on a year-over-year basis owing to growth in land based activity in Saudi Arabia and offshore activity in the Asia pacific region. However, the Europe/Africa/CIS market could face some headwinds on the back of the economic sanctions on Russia and geopolitical challenges in Libya.

Expect Customers To Cut Back On Some Activity, Push For Better Terms

Benchmark Brent crude oil prices have fallen below $50 per barrel, touching six year lows, owing to sluggish outlook for global oil demand growth and strong supplies from U.S. shale oil fields. Prices could remain under pressure through 2015, due to further growth in U.S. production. Analysts at Goldman Sachs have lowered their three-month price forecast for Brent to $42 a barrel. ^[2] The near-term situation doesn’t bode well for the oilfield services industry, since oil and gas companies are seeing their cash flows come under pressure, leading them to cut back on their capex budgets for 2015. Most companies that have released 2015 capex guidance indicate cuts of 20% and upwards. Activity directed towards tight oil plays in particular is likely to come under stress, given the higher marginal production costs and  shorter investment planning cycles. New investment and drilling activity is likely to be cut back significantly in higher hurdle rate plays. However, we don’t expect the cuts to come immediately for more developed unconventional plays such as the Bakken and Eagle Ford, given that oil companies have already invested significant sums in leasing rigs and developing wells and related infrastructure (largely sunk costs) and they will still need to spend on production-related services to maximize the productivity of existing wells. However, Halliburton is likely to see customers push for better prices and contract terms for services. Deepwater activity is unlikely to take a meaningful hit, given the long contract horizons (typically 8 years) although customers might be more circumspect about committing to large new projects in the current environment.

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1. Halliburton’s (HAL) CEO Dave Lesar On Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
2. Oil prices extend falls; Goldman Sachs slashes price forecasts, Reuters, January 2015 [↩]