Halliburton’s Sharp Growth In International Markets Helps Beat U.S. Drop

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Halliburton (NYSE:HAL) released its Q2 results recently, posting sequentially flat results as a decline in operating profits from North America was offset by a sharp increase in business in other markets. The company’s operating margins in North America declined from about 25% in Q1 to about 20% in the last quarter. [1] The oilfield services provider had warned that margins could be hit by a rise in input costs. However, a weak performance in North America was tempered by strong growth in Europe, Africa and the CIS and in the Middle East and Asia.

We have revised our price estimate for Halliburton to $41, and the change in our price estimate mainly reflects lower rig count and revenue per rig growth estimates for North America. We have also slifghtly lowered our estimates for the company’s capital expenditure and its terminal growth outlook.

Click here for our full analysis of Halliburton.

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North America

The Exploration and Production (E&P) industry in North America has seen a dramatic change in 2012 because of the low price of natural gas. Explorers are shifting attention to liquid rich plays, resulting in a realignment in the industry. The concentration of industry capacity in liquid rich basins is resulting in lower pricing of services. Service providers have noted that bidding prices for fracking have dropped up to 20% from their peak levels. The low pricing environment has also forced players to absorb rising input costs. Halliburton had warned that its profits in this quarter could be hit by higher costs.

The weakness in American onshore E&P has partially been offset by a revival in deepwater activity in the Gulf of Mexico. Players are ramping up activity in the Gulf after the recent auction of exploration permits. We expect this to temper the decline in onshore activity in North America.

International markets

Halliburton’s sequential operating profits in Q2 rose by approximately 66% and 40% in Europe, Africa and the CIS and the Middle East and Asia markets respectively. The company has met reasonable success in its efforts to gain market share in the Eastern Hemisphere. E&P in these markets has grown in Q2 despite a fall in oil prices in the period. Growth in these markets could ramp up in the future as unconventionals and deepwater activity picks up in these regions.

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Notes:
  1. HALLIBURTON ANNOUNCES SECOND QUARTER EARNINGS, Halliburton []