Halliburton Q1 Preview: North American Unconventionals Exposure Will Prove A Liability

Halliburton (NYSE:HAL), the second largest oilfield services provider, is expected to publish its Q1 2015 earnings on April 20th, reporting on a tough quarter that saw oilfield activity drop as oil and gas companies dialed back on upstream capital spending to cope with weaker crude oil prices. We expect Halliburton to report that earnings  declined meaningfully on a year-over-year and sequential bases, given the lower rig activity, service cost deflation and the firm’s large exposure to the North American tight oil market where a bulk of the cuts are taking place. However, the impact could be softened, albeit slightly, by resilience in international markets such as the Middle East and Asia. While the turmoil in the oil markets began in H2 2014, it didn’t work its way into Halliburton’s Q4 2014 earnings, as customers executed as planned against the reminder of their 2014 budgets, allowing the company to post year-on-year growth. That said, the Q1 results should give us a better visibility into how the current downturn and spending cuts are going to impact earnings, going forward, if oil prices are to remain at currently depressed levels. Here’s a quick look at some of the trends that will influence Halliburton’s results.

Trefis has a $48 price estimate for Halliburton, which is about 6% ahead of the current market price. We will be updating our price estimate and rig count forecasts post the earnings release.

See Our Full Analysis For Oilfield Service Companies Halliburton| Schlumberger |Baker Hughes

Heavy Exposure To North America Will Prove A Liability

Halliburton derives over 50% of its revenues from the North American market and a bulk of this revenue comes from the U.S. land market. This will prove to be a significant liability for the company in the current environment. Oilfield activity in the North America is primarily driven by shale and tight oil projects, which have higher marginal costs of production (estimated break-even upwards of $60 per barrel) and shorter planning horizons that allow operators to respond to the commodity cycle more quickly. North American drillers, many of whom are highly leveraged, have rapidly cutback on rig activity to better manage their cash flows, causing the average North American rotary rig count to decline by about 27% year-over-year during Q1. The oil rig count in the United States is down by about 49% since the beginning of this year.

Halliburton’s North American Drilling and Evaluation segment is likely to take the biggest hit as drilling activity plummets and customers negotiate for better rates. However, the impact of the downturn on the North American Completion and Production segment (which accounts for about 40% of the company’s total revenue) could be more mixed. While pricing and overall activity will certainly decline, there are likely to be some bright spots. For instance, operators have been increasingly focusing on well productivity as they look to maximize investments on their already drilled wells, even as cash flows from production trend lower.  This should allow demand for services like pressure pumping and artificial lift to hold up slightly better. Re-fracking is another trend that has been gaining momentum over the last few months, and this could help to moderate the decline in revenues for Halliburton’s bread-and-butter pressure pumping operations which account for about a third of the company’s business. (related: Recent Trends In The U.S. Land Drilling Market: Re-fracking, Growing Well Inventory, Lower Rig Counts)

International Markets Could Prove Slightly More Resilient

International rig activity has remained more resilient with the average rig count falling by just 5.5% year over year during the first quarter. ^[1] This is likely due to the fact that global activity is dominated by more conventional and offshore drilling, which have longer planning horizons and lower marginal production costs. Drilling activity has actually increased year over year in regions such as the Middle East where the rig count has grown by about 3% compared to last year. Halliburton had previously indicated that it expects most of its recent project awards in Saudi Arabia, Iraq, the UAE, and Kuwait to move forward as planned. ^[2] That said, we expect meaningful declines in activity in Latin America (where high-cost ultra-deepwater has been a big driver) and the Europe/Africa/CIS region. Halliburton has been taking some steps to prune down its cost base to better cope with the downturn. In February, the company said that it would shed up to 8% of its global workforce in a move that could amount to as many as 6,400 jobs cuts. The layoffs are unrelated to its acquisition of smaller rival Baker Hughes, which is expected to close in H2 2015, subject to the regulatory process.

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