Halliburton Q3 Earnings Preview: International Operations In The Spotlight

Halliburton Company (NYSE:HAL) will report its Q3 2012 earnings on October 17^th. Natural gas prices remained weak in the United States over the last quarter while crude oil prices witnessed a slight recovery. In North America, the rotary rig count, held steady for oil rigs while experiencing a sharp decline of 20% for gas rigs. Internationally the situation was quite the opposite; the gas rig count grew modestly by about 7% while the oil rig count fell by about 6%. ^[1] The rig count is widely accepted as a proxy for upstream activity, influencing the demand for services provided by oil field service companies such as Halliburton.

Margin Pressures in The North American Market

Halliburton is more dependent on the North American market than many of its peers, and we believe that this region will be a drag on the company’s quarterly earnings.

We expect the company’s pressure pumping business to face pricing pressures due to the availability of excess capacity in the North American market. The continuing decline of natural gas prices is also forcing oil and gas companies to focus on reservoirs that offer better economics such as liquid rich plays. This could create logistical issues for the company and given that liquid plays require a lower comparable horsepower for stimulation, it may further add to the overcapacity woes.

We expect things to look a little more positive on the offshore front as the issuance of new drilling permits in the Gulf of Mexico has seen several new deepwater rigs arrive in the region. Halliburton has won contracts for directional drilling, fluids, wire line and completion services, and we expect these contracts to improve margins going forward since deepwater drilling promises higher rates and better profit margins.

In Canada, we expect the company’s revenues to be higher compared to the last quarter as rigs actively resume work following the seasonal spring breakup.

International Markets Expected To Continue to Drive Growth

In the second quarter, Halliburton reported healthy revenue and margin growth in international markets, and we expect this trend to continue given the company’s contract wins in Latin America, Europe and Africa.

In East Africa, the company provides services including drilling, completion and cementing to all deepwater rigs operating in the area. We expect this to help the company make inroads into land based drilling in the region. In Libya, a key North African market, oil exploration activity is experiencing a resurrection following the end of the civil war last year and international oil firms such as BP (NYSE: BP) are resuming operations in the country.

In Brazil, a booming market for offshore exploration, the company mobilized its equipment for its wireline contracts over the second quarter, and we expect this to begin contributing to the company’s revenue stream in Q3 as the services commence. We will also be interested to know of the progress the company has made in its bids for directional drilling and testing in the Brazilian market. ^[2]

Growth In Unconventional Plays In International Markets

Halliburton is recognized as a leader in unconventional plays such as shale gas in the US market; however, the company has severely under-capitalized its unconventional play opportunities in the international market. We are particularly interested in hearing the progress the company has made in markets such as China, Argentina and Mexico, which are rich in shale hydrocarbons.

We have a price estimate of $43.05 for Halliburton, which is about 25% ahead of its current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Baker Hughes Rotary Rig Count [↩]
2. Halliburton Q2 Earnings Call, Seeking Alpha [↩]