Halliburton’s North American Business Under Performed In Q4, Will Things Get Better In 2019?
Halliburton (NYSE:HAL) published its Q4 2018 results on January 22, reporting a than better than expected set of earnings that was driven by strong international activity (revenue up 7% sequentially), with oil companies increasing their spending, although the company’s North American business continued to underperform. In this note, we focus on the company’s North American operations and what lies ahead.
Permian Headwinds, Operator Focus On ROIs
Revenues from North America declined by 2% year-over-year and by 11% sequentially to $3.3 billion, as operator budget exhaustions and off-take capacity bottlenecks in the Permian Basin hurt activity. In particular, demand and pricing for fracking services – which is Halliburton’s bread and butter – trended lower. Moreover, as U.S. production has soared in recent years, many operators in the land market have shifted their strategy from production growth to focus on operating within their cash flows in order to generate better returns on investments.
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Outlook For 2019
The outlook for 2019 also appears somewhat mixed, considering that the recent decline in oil prices (down ~30% since October) has impacted the company’s customer budgets for the year. While Halliburton expects oil majors to stay the course with their 2019 budgets, it indicated that they could focus their attention on North American shale plays, shifting away from offshore and deepwater. However, smaller players are likely to scale back meaningfully on their budgets if commodity prices do not improve, considering their limited access to capital.
However, there are multiple factors that could support the company’s business in North America. For one, the number of drilled but uncompleted wells has reached a record in the region and this could prove to be a revenue opportunity for the company’s production business, although it might hurt drilling operations. Additionally, the takeaway capacity constraints in the Permian basin are likely to be addressed by the second half of the year, as new pipelines come online. Moreover, there is a possibility that oil prices could pick up gradually over the year driven by supply cuts by Russia and OPEC, as well as a possibility that the Trump Administration will tighten its sanctions on Iran, constraining its oil exports.
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