Halliburton’s 3Q Performance Driven By Resilient International Markets, Remains Optimistic On North American Recovery

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Even while Halliburton (NYSE:HAL) – the world’s second largest oilfield contractor – faced a rough quarter, much like the entire oil and gas industry, it has managed to outperform its largest rival, Schlumberger (NYSE:SLB), by posting more resilient results in the international markets which are otherwise dominated by the market leader. Though the Houston-based company witnessed a notable decline in its revenues due to the sluggish drilling demand during the third quarter, the company foresees its North American shale exposure turning into a huge upside when the oil market rebounds. Since the oil market is likely to remain challenging in the next few quarters, we expect to see a meaningful decline in Halliburton’s top line as well as earnings. However, the pending Baker Hughes (NYSE:BHI) merger, which is expected to be completed by the end of 2015, and significant presence in the unconventional oil play markets will enable the company to bounce back as soon as the current oil environment changes. We briefly discuss the key highlights of Halliburton’s third quarter results, which were released on 19th October 2015 [1].

HAL-3Q price

Source: Google Finance

Decline In North American Drilling Activity Results In Lower Revenues

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As expected, Halliburton saw a decline in its third quarter revenue due to the pull back in the upstream capital spending by large oil and gas companies driven by the plummeting crude oil prices. The company reported 3Q revenue of $5.6 billion, 6% lower on a sequential basis, missing the consensus estimate slightly. This decline was largely driven by the drop in North American drilling demand, which is evident from the 60% fall in the oil rig count in the region since the beginning of the year [2]. On the other hand, the international markets, which have been more resilient to the plunge in crude oil prices, enabled Halliburton to outdo its largest competitor, Schlumberger, in its dominant markets. While Schlumberger posted a higher decline from the international markets in the September quarter results last week, Halliburton managed to deliver better-than-expected revenue as well as margins despite its limited exposure to these markets. The company highlighted this outperformance during its third quarter conference call, in order to improve the market perception about its future prospects. We expect this to work in its favor and reinforce investor confidence in the fundamentals of the company.

HAL-3Qrev

Source: Halliburton Form 8-K, 19th October 2015

Cost-Cutting Efforts To Continue To Sustain Margins Going Forward

Driven by the cost reduction initiatives undertaken in the previous quarters, Halliburton posted an improvement in its international margins both sequentially and annually as opposed to Schlumberger, who experienced a decline in its international performance in the last three months. However, in the wake of the current downturn, oilfield services company’s earnings dropped drastically and the company recorded a net loss of $54 million, or $0.06 per share in the September quarter, primarily due to one-time charges such as asset write-offs, severance costs, and acquisition-related costs arising from the pending merger with Baker Hughes. This compares with a profit of $55 million earned by the company in the last quarter. While this significant fall implies that the down cycle continues to weigh heavily on the company’s bottom line, this also indicates that the company is fully committed towards completing the merger within the stipulated timeline.

HAL-3Qmargins

Source: Halliburton Form 8-K, 19th October 2015

Halliburton recently announced further job cuts (up to 2,000 jobs), primarily in the North American region, as the region has been the worst hit by declining commodity prices. With these job cuts, the company has reduced almost 19% of its headcount since the beginning of the oil slump. Although we do not expect these initiatives to show a significant impact on the company’s earnings immediately, we anticipate these cost reduction measures, coupled with the cost synergies from the Baker Hughes merger, if it passes through, to allow the company to survive this downturn much more efficiently.

Halliburton Sees Light At The End Of The Tunnel

While the oilfield giant and Halliburton’s closest rival, Schlumberger, is sailing through the present oil price conditions on its limited exposure to the North American drilling market, Halliburton sees its large presence in the same market as an opportunity for the future. In the latest industry conference held last month, Halliburton pointed out that the North American unconventional plays are likely to yield higher returns due to lower costs and will require shorter time to be developed. As a result, these markets are expected to recover faster than the conventional oil and gas plays. In addition, Halliburton offers services that account for more than 50% of the capital spent on these unconventional plays. Thus, Halliburton is well-positioned to benefit from these trends and outperform its peers, as, and when, the market conditions improve.

HAL-NAM

Source: Barclays CEO Energy-Power Conference, September 2015

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Notes:
  1. Halliburton Announces 3Q Results, 19th October 2015, www.halliburton.com []
  2. Baker Hughes Rig Count Data []