Halliburton To Miss 1Q’17 Earnings Estimate As It Ramps Up Activity To Defend Market Share

Having made a strong comeback in the second half of 2016, Halliburton (NYSE:HAL), the world’s second largest oilfield services company, is likely to miss its 1Q’17 earnings expectations((Halliburton To Announce March Quarter 2017 Results, 15th February 2017, www.halliburton.com)), despite the recovery in commodity prices during the quarter. This is because the Houston-based company has already deployed much more pressure pumping equipment than it had earlier decided to reactivate this year. As a result, the company has witnessed a steep rise in its operational costs, which is expected to weigh on its March quarter results. In addition, Halliburton has plans to increase its US land workforce by 2,000 employees, which will further hurt its bottom-line for the current as well as next quarter. That said, we believe that the company’s strategy to proactively leverage the recovery in the drilling demand to maintain its market share might hit its profits in the short-term, but will reap notable results in the long-term.

See Our Complete Analysis For Halliburton Here

Key Highlights Of 1Q’17

Since the beginning of 2017, the members of the Organization of Petroleum Exporting Countries (OPEC) have restricted their oil production in accordance with the agreement signed in November 2016. This caused crude oil prices to trade between $50-$55 per barrel for the first two months of the year. However, the growing US inventory and production in March increased the uncertainty in the commodity markets, pushing oil prices below the $50-per-barrel mark, yet again.

Despite the volatility in oil prices, the global rig count grew sharply from 1,772 units at the beginning of the year to 1,985 units at the end of the first quarter. Consequently, the demand for drilling and exploration equipment and services recovered drastically. This allowed Halliburton to take advantage of the improving demand conditions in the quarter and deploy almost twice the amount of pressure pumping equipment than it had originally planned to reactivate through the entire year. Clearly, this move is likely to result in a large jump in the company’s operational costs for the first half of 2017, which will drag down its profits for the March and the June quarter.

That said, we believe that the move is well-grounded and has merit, since two of the company’s closest competitors – Schlumberger (NYSE:SLB) and Weatherford (NYSE:WFT) – have recently come together to combine their North American fracking and completion units to compete with Halliburton, who is a market leader in this segment. Thus, we understand that the sudden shift in the company’s strategy to penetrate the recovering markets, instead of concentrating on improving its margins, will enable it to defend, or even expand, its market share in this sector, which will boost its profits in the long-term.

Apart from the rising costs associated with deploying new resources, Halliburton aims to hire over 2,000 oil field workers by the end of the first quarter, especially in West Texas, in order to cope with the recovering drilling demand. Earlier, the company had retrenched 35,000 employees in the last two years in order to reduce its operational expenses. However, this hiring drive is likely to result in higher workforce costs for the company, further pulling down its earnings for the quarter. To top this, Halliburton has also seen a rise in its fracking sand costs in the last couple of months, which will further pinch its earnings for the quarter. In fact, Dave Lesar, the company’s Chief Executive Officer (CEO), pointed out in the company’s latest operational update that the management anticipates the first quarter earnings to be in low single digits due to the surge in its operational costs.

As a result of this announcement, the market analysts, who had previously estimated the company’s earnings to rebound strongly on the back of growing drilling demand, revised down the company’s earnings estimate significantly. Also, the company’s stock dropped more than 3% immediately after the company announced this news on 24th March. However, ever since the stock has recovered indicating that the market has realized that the short-term loss of earnings would result is higher profits in the future.

Source: Google Finance

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