Halliburton Beats Market Once Again; Remains Optimistic About North American Recovery

Contrary to the pessimistic tone set by its closest competitor, Schlumberger, Halliburton (NYSE:HAL) exceeded the analyst estimate for revenue as well as earnings for the March quarter of 2017((Halliburton Reports March Quarter 2017 Results, 24th April 2017, www.halliburton.com)), backed by the rebound in North American drilling demand. While the company surpassed the market expectations by only a small margin on both the fronts, the news sent a wave of optimism among the investors, taking the price 2% higher within hours of the announcement. However, the drop in crude oil prices during the day wiped out the stock’s gain, forcing it to close slightly lower than the previous trading day.

That said, Halliburton’s streak of posting positive earnings for three consecutive quarters is indicative of its strong fundamentals and excellent managerial expertise, which is sufficient to cope with the worst-ever commodity downturn. In the coming quarters, the company expects the North American onshore markets to lead the rebound in the oilfield services demand and aims to leverage its dominant presence in these markets to bounce back to its historical profits and returns.

Operational Highlights

Based on the company’s commentary last month, Halliburton faced a sudden surge in the demand for drilling in the North American shale markets, as the crude oil prices traded in the $50-$55 per barrel range for most part of the first quarter. As a result, the world’s second largest oilfield services company, that had previously decided to focus on improving its margins in 2017, pivoted to its strategy of maintaining its share in these markets by rapidly supplying more equipment than it had planned to do in the entire year. Consequently, Halliburton witnessed a 24% increase in its North American revenue on a sequential basis, as opposed to a merely 6% rise posted by Schlumberger in the region.

However, the company’s overall revenue continued to suffer due to the weakness in its international markets, particularly Angola, North Sea, Russia, and Nigeria. The Houston-based company’s international revenue dropped 8% sequentially, causing its 1Q’17 revenue to rise by only 6% compared to the same quarter of last year. While the improvement in revenue is not exactly analogous to the rebound in the global rig count, it is drastically better compared to the industry leader, Schlumberger, that posted a sequential decline of 3% in its top-line for the first quarter of 2017. (Read: Schlumberger Misses 1Q’17 Estimates Due To Weak International Markets; North America To Lead Recovery)

Source: Company Filings

That said, the full impact of Halliburton’s revenue growth could not tickle down to its bottom-line. The company’s efforts to grab a lion’s share of the improving North American drilling demand led to a notable rise in its operating costs and its fracking sand costs, pulling down its profits during the quarter. While this move did shrink Halliburton’s operating profits in the March quarter, and is likely to drag down its margins in the next quarter as well, it will enable the company to defend, or rather expand, its market share in the North American onshore markets, that are anticipated to be the key driver in the recovery of the oilfield services sector.

On the financial front too, Halliburton showed strong signs of recovery. The company’s cash flow from operations turned positive for the first time in the last five quarters, which allowed it to repay $1.6 billion of its long-term debt during the quarter. Further, the company also paid a quarterly dividend of $156 million, or $0.18 per share. However, unlike Schlumberger, that has regularly spent money on repurchasing its shares even in this slowdown, Halliburton has not repurchased any of its shares over the last two years. This implies that despite the fast recovery in its operational performance, the company is being cautious and is trading current shareholder returns for future growth.

Source: Google Finance; US Energy Information Administration (EIA)

Path Forward

Similar to the previous call, Halliburton reiterated the importance of North American onshore markets in the overall recovery of the oilfield services industry, and expects its revenue growth in the region to outperform the rise in the rig count in the coming quarters. However, OneStim, a joint venture between Schlumberger and Weatherford, formed to provide hydraulic fracturing and multistage completions technologies in these markets at relatively lower costs, is expected to pose a hindrance to Halliburton’s plan. That said, we believe that the company’s dominance in these markets will allow it to service the rising demand more readily, while the joint venture is likely to take another 3-6 months to take a concrete shape. Also, it has already adopted an aggressive approach to tap the growing drilling demand in the last quarter, giving the company an edge over its competitors. Thus, we expect North American markets to drive Halliburton’s growth in the next few quarters. However, the anticipated weakness in the international markets could prove to be an impediment to the company’s recovery in 2017.

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