Halliburton’s Positive 3Q’16 Results Bring Hope For The Oilfield Services Industry

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As expected, Halliburton (NYSE:HAL), the world’s second largest oilfield services company, displayed an evident improvement in its third quarter profits, both annually as well as sequentially, owing to the recovery in commodity prices and rig count. Despite missing the consensus estimate for its revenue due to continued pricing pressure in the market, the Houston-based company managed to exceed the earnings expectation by posting a profit of 1 cent as opposed to a loss of 7 cents, as expected by the market. The better-than-expected result by the oilfield service provider has set a optimistic tone for the earnings season and has reassured investor belief that the commodity markets are progressing towards the path of recovery.

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Key Highlights Of Halliburton’s 3Q’16 Earnings

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Backed by the rebound in commodity prices and, in turn, the global rig count, Halliburton’s reported total revenue of $3.83 billion in the September quarter. While the revenue was more than 30% lower compared to a year ago, it remained largely flat compared to the previous quarter. This was primarily driven by the strong recovery made by the North American markets during the quarter.

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The North American rig count (oil and gas) increased by over 28% in the third quarter due to the sharp improvement in commodity prices, particularly natural gas. As a result, Halliburton’s revenue from the region grew 9.4% in the quarter, offsetting the weakness in the company’s international markets. This increase marked the first rise in the North American revenue for the company in the last seven quarters, solidifying the company’s stance that the commodity markets have bottomed out.

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Source: Baker Hughes Rig Count

This was also the first time in the last one year that the company has recorded a profit, even though a meager one. While the North American region continued to remain unprofitable, the magnitude of losses has dropped notably, allowing the company to report improvement in its operating margins. Halliburton has managed to expand its market share in the North American markets, particularly since the onset of the commodity downturn, becoming a market leader in that region. Hence, after having posted a small profit in this quarter, the company has now changed its strategy and aims to focus on improving its operating margins rather than defending its market share in that region. In line with this plan, the oilfield contractor expects to increase the pricing of its services and equipment to improve its profitability in the coming quarters.

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Apart from the improvement in its operational performance, Halliburton continued to realize income tax benefit on its declining profits. As a result, the company booked a net profit of $6 million or 1 cent per share for the latest quarter, taking the investors and the market by surprise. Hence, the US-based company’s stock  jumped by more than 4% post the announcement of the results.

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However, the company’s year-to-date cash flows continue to be low compared to the last year. Yet, the company has managed to repay more than $3.1 billion of its long-term debt in the last nine months. This is positive news for the investors of the company, who had been worried about the company’s increasing leverage (Read: Schlumberger Versus Halliburton: Who Has A Better Financial Position?). Further, the company continues to restrict its capital spending budget to $850 million for the full year 2016 and has been on track to achieve this goal. In addition, the company has maintained its dividend payments over the last year, implying that the management is sensitive to returning value to its shareholders even in the current downturn.

Guidance For 4Q’16 And Beyond

Despite the improvement in the third quarter, Halliburton foresees a weak drilling activity in the fourth quarter of 2016, due to the holiday and seasonal downturns, and maintenance shutdowns. However, the company expects the North American drilling demand to pick up in early 2017 and beyond. On the international front, the oilfield contractor expects the rig count to bottom out only in the first half of 2017, and consequently, aims to leverage the recovery in the North American markets to sustain its margins. However, the company foresees a challenging future for the deepwater market in the near term.

See Our Complete Analysis For Halliburton Here

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Halliburton Company

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