Halliburton Posts Q4 Growth, Difficult Year Ahead

Halliburton (NYSE:HAL), the second largest oilfield services provider, published its Q4 2014 earnings on January 20, reporting on a difficult quarter for the broader oil and gas industry that saw benchmark crude oil prices collapse by close to 40%. While the turmoil in the oil markets didn’t work its way into Halliburton’s Q4 earnings, as customers largely executed as planned against the reminder of their 2014 budgets, the company’s outlook for 2015 looks challenging amid upstream capex cuts and lower projected rig activity. The company’s performance for the quarter was largely driven by strong completion and production activity in North America and higher drilling and evaluation related activity in the Middle East/Asia geomarket. While quarterly revenues grew by 14.8% year-over-year to $8.77 billion, adjusted operating income grew by around 22% to $1.45 billion. ^[1] In this note, we take a look at some of the key takeaways from the company’s earnings release and what lies ahead for Halliburton.

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 to account for the earnings release and weaker outlook.

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Earnings Grow As Customers Executed On 2014 Budgets

Halliburton’s North American completions and production business proved to be a key driver of earnings for the quarter, with revenues from the segment growing by 30% year-over-year to $3.71 billion, while operating margins also expanded by around 3.5% to 20%. However, on a sequential basis, revenues remained relatively flat, likely due to the depressed oil prices. Pressure pumping, which is the company’s single largest product line, saw service intensity rise through 2014 with higher pumping volumes and stage counts. Halliburton reported that fracking sand volumes increased by 46% year-over-year on a per-well basis. The North American margins also benefited from cost efficiencies related to the deployment of more efficient and lower maintenance pressure pumping equipment, streamlined field operations and the company’s move to vertically integrate portions of its logistics network. The company’s Middle East/Asia operations also did well on the back of strong seasonal year-end software and equipment sales as well as higher integrated project-related activity in Saudi Arabia, Iraq, India and Indonesia. Quarterly revenues from the geomarket grew by 16% year-over-year while operating margins expanded to about 19%.

Outlook For 2015 Looks Challenging

Benchmark Brent crude oil prices have fallen to levels of 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. Oil and gas companies have been adjusting their capital spending to operate within their currently constrained cash flows, leading to a weak outlook for oilfield services activity. Capex cuts of 20% and upwards seem likely across the industry. Customers have also been increasingly pushing for discounts on oilfield services and Halliburton noted that price reductions are occurring across all of its product lines.

Activity levels are likely to take the biggest cuts on the North American land markets, which are driven by high marginal cost tight oil production. The rig count in the United States is down by around 9% since the beginning of the year and further declines look inevitable. Halliburton is likely to face significant headwinds in international markets as well. The Middle East/Asia segment is likely to be the most resilient of the geomarkets, since the company expects most of its recent project awards in Saudi Arabia, Iraq, the UAE, and Kuwait to move forward as planned. However, activity levels in other markets such as Malaysia and Australia are likely to be impacted by reduced consumer spending and delayed projects. Latin America is also likely to see declines, owing to lower activity levels in Mexico and Colombia, although this is likely to be partially offset by growth in unconventional activity in Argentina and the start-up of a new integrated asset management project in Ecuador. The Europe/Africa/CIS region is likely to be the worst hit, with activity expected to decline significantly across the region. ^[2] Halliburton is looking to right size its operations to better align them with the decline in the rig count and upstream activity. While the company announced that it was eliminating about 1,000 jobs in the Eastern Hemisphere during the fourth quarter,  it noted that it intends to make further headcount adjustments that are roughly in line with its major competitors. Baker Hughes (NYSE:BHI)  and Schlumberger (NYSE:SLB) have announced cuts of around 7,000 and 9,000 jobs, respectively.

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1. Halliburton Q4 2014 Earnings Press Release [↩]
2. Halliburton’s (HAL) CEO Dave Lesar on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, January 2015 [↩]