2015 Earnings Review: Depressed Commodity Prices Take A Toll On Halliburton’s Earnings; Outlook Remains Weak

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Much like the rest of the oil and gas industry, Halliburton (NYSE:HAL), the world’s second largest oilfield contractor, reported weak 2015 numbers earlier this week, driven by the depressed commodity prices through the year [1]. The unprecedented decline in drilling activity, particularly in North America, led to a notable drop in the company’s top line as well as earnings during the year, which was partially offset by the higher resilience displayed by its international markets. Since the company anticipates a bleak outlook for the commodity markets in 2016, we expect to see further revenue decline and margin contraction for the company in the coming quarters. However, Halliburton’s presence in the unconventional oil play markets will enable it to outperform its peers, when the oil market rebounds. Let’s take a quick look at the key highlights of the company’s 2015 results and its outlook for 2016.

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Source: Google Finance

International Resilience Dampens The Weakness In North America

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The plunge in commodity prices over the last 18 months has resulted in a steep fall in the drilling demand, due to the huge pull backs in exploration and production budgets by major oil and gas companies. This resulted in a 35% drop in the rig count worldwide [2]. As a result, Halliburton generated consolidated revenue of $23.6 billion, representing a decline of 28% on a year-on-year basis. The majority of the decline is attributed to the 40% drop in the company’s North American revenue, which was driven by the 62% fall in the US rig count. However, this was partially offset by the better-than-expected results from the international markets, which experienced a 13% decline in the rig count during the year. In fact, Halliburton managed to outperform its closest rival and market leader, Schlumberger, by displaying higher resilience in the international markets, both in terms of revenue as well as earnings.

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Further, Halliburton has been able to hold up well even in this worst-ever commodity down cycle with the help of its seasoned management team and a proven playbook. Due to its focus on cost management, the company restructured its cost and reduced its global headcount by 25% in 2015. In addition, the world’s second largest oilfield services company worked diligently with its customers to improve the economics of their projects through technology and operating efficiency. Despite this, the company saw a contraction in its operating margins for the year. Halliburton reported pre-tax profits of $2.6 billion in 2015, almost half of the profits generated in 2014. As a result, the company’s pre-tax operating margin fell from 16.5% in 2014 to 11% in 2015.

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Update On Baker Hughes Merger

The much talked about merger between Halliburton and Baker Hughes went through several ups and down during 2015. The timing agreement with the US Department of Justice (DOJ), which was extended a couple of times during the year, expired in December with the DOJ informing the company that proposed divestitures were not sufficient to address the antitrust concerns. However, the DOJ did not initiate litigation against the merger and acknowledged that they would assess further proposals submitted by the company. Consequently, Halliburton along with Baker Hughes extended the period to obtain required regulatory approvals to no later than April 30, 2016, but remain focused on completing the deal as early as possible.

Earlier this month, Halliburton presented an enhanced proposal of divestitures to the DOJ for its approval, and has also informally notified the other jurisdictions about it. With respect to the European Commission (EC), the company has entered the phase 2 of review, wherein it will formally propose remedies which could potentially satisfy any competition concerns. Since the company has not reached an agreement with the DOJ or EC about the adequacy of the divestitures, the sale of proposed divestitures has not been completed yet. However, the company is in conversation with the interested buyers for the sale of its proposed assets, as it remains committed towards getting the necessary approvals for the deal. Also, the company believes that despite the delay in regulatory clearances, the estimated synergies from the transaction would remain intact.

See Our Complete Analysis For Halliburton Here

Going Forward

Just like its peers, Halliburton, too, sees a challenging year ahead, as the commodity prices are expected to remain weak through 2016, keeping the capital budgets of oil and gas companies low. The company expects the North American markets to continue to decline, while the Middle East/Asia markets are likely to be more resilient. Europe/Africa/CIS, and Latin America are anticipated to see a sharp drop in the drilling activity due to economic instability, while Australia, and India are expected to be impacted by reduced customer spending and delayed projects. Despite this, the company remains confident about its ability to weather the current downturn by actively working with its clients and reducing their cost structures through more efficient well design and the adoption of new standards for production systems.

While it is difficult to predict the exact timing of the oil price recovery, Halliburton is working hard to sustain its margins by restricting its cost through job cuts and operational efficiencies. However, the company remains optimistic about its fundamentals and aims to outperform the industry once the market rebounds, given its access to unconventional oil plays. Further, its proposed merger with Baker Hughes is likely to add depth to Halliburton’s product portfolio and markets, allowing it to outpace Schlumberger in the long term.

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Notes:
  1. Halliburton Announces 2015 Numbers, 25th January 2015, www.halliburton.com []
  2. Baker Hughes Rig Count []