Halliburton Set For Another Good Quarter; Foresees Unsustainable Drilling Demand In 2018
Having shown tremendous improvement in the last few quarters, Halliburton (NYSE:HAL), the world’s second largest oilfield services company, is set to post a stellar financial performance for the June quarter 2017 on 24th July 2017((Halliburton To Announce June Quarter 2017 Results, 16th May 2017, www.halliburton.com)). Given the rising rig count and growing drilling demand, particularly in the North American markets, the Street expects the Houston-based company to witness a remarkable jump in its top-line as well as bottom-line for the second quarter.
However, the company’s business development head, Mark Richard, recently commented that the demand for oilfield services and equipment is unsustainable, and will lead to the weakening of the US shale boom in the next year. Further, Halliburton’s number two position in the oilfield services industry is under threat with the completion of the Baker Hughes-GE merger. Consequently, the company continues to acquire and/or enter into new partnerships with key players in complementary segments in order to defend its leading position in the industry.
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Rising Drilling Demand May Not Be Sustainable In The Long Term
Driven by the rebound in commodity prices in the first quarter, the global rig count, primarily in the North American markets, continued to grow sharply even in the second quarter. The global rig count increased by more than 45% on a year-on-year basis to 2,014 units at the end of the June quarter, while the North American rig count more than doubled to 1,081 units during the same period. This rising demand for drilling and exploration equipment and services was driven by the growing investments by North American shale producers to resurface their production to leverage the improving commodity prices. Thus, oilfield service providers, like Halliburton, are likely to benefit from this steep growing drilling demand, and are expected to report strong results in the current and forthcoming quarters.
That said, the rally in commodity prices, particularly crude oil, subsided in the second quarter due to the rising US oil inventories and production. The global benchmark, WTI crude oil, averaged at $48 per barrel in 2Q’17, down from an average of $52 per barrel in the previous quarter. Thus, we believe that the sudden growth in drilling demand may not be sustainable, and is likely to shrink in the coming quarters, when the commodity prices plunge again. In fact, Halliburton’s management recently confirmed that the rising drilling demand seems to be unsustainable for the oilfield services sector. According to the company’s business development head, the US rig count is estimated to increase to more than 1,000 units by the end of the year. However, he foresees 800-900 rigs as a more sustainable level for the industry in the medium term. This implies that while the drilling demand is estimated to grow throughout 2017, there are chances that it may drop again in 2018, causing a decline in Halliburton’s revenues and profits in the next year.
Source: Google Finance; US Energy Information Administration (EIA)
Halliburton Acquires Summit ESP
On 5th July 2017, Halliburton announced its plans to acquire Summit ESP, a leading provider of electric submersible pump (ESP) technology and services. Summit ESP provides artificial lift offerings that are increasingly being used to prolong the life of aging shale wells, and is backed by Oklahoma energy and banking billionaire George Kaiser. Further, the company has an unrivaled service quality, proven technology, and US market leadership in the artificial lifting segment, which makes it a perfect fit for Halliburton. The deal is likely to strengthen Halliburton’s existing artificial lift capabilities, and enhance its leading position in North America oilfield services industry. However, since the deal comes after its failed attempt to acquire Baker Hughes and a Russian company last year, the success of this deal will be crucial for the company and its valuation going forward.
Appointment of New Chief Financial Officer (CFO)
The June quarter has seen some significant changes in the top leadership positions of Halliburton. Firstly, Jeffrey Miller, who has been a part of the company since 1997 and held various leadership roles, was appointed as the new CEO with effect from 1 June 2017. Miller has a strong track record of leading several successful projects and negotiating great deals with customers, and has been trusted with the task of renegotiating contracts with oil producers, convincing them to pay more for the company’s pressure pumping and other services. Secondly, the company appointed Christopher Weber as the Executive Vice President and Chief Financial Officer (CFO), effective from 22 June, 2017. Weber has more than 20 years of experience of holding key roles in finance, strategic planning, corporate development, and operations in various companies in the energy industry, and has a reputation for execution and achieving results. While the company has managed to appoint befitting executives to its top positions, it remains to be seen how effective the company’s executive team proves in weathering the worst-ever commodity downturn.
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