Halliburton Puts Up a Narrow Beat in Q1 but Long-term Headwinds Remain

This video was recorded on April 24, 2017.

Chris Hill: Let's start with Halliburton. First quarter profits came in slightly higher than expected. I guess they're doing some more drilling in North America.

Taylor Muckerman: Yeah, that's the key here. It always is for Halliburton. The largest land driller in North America. Starting to gain an international presence. But over 50% relies on North America. Revenue there is up 24% quarter over quarter. Typically, you see a little bit less of rig activity in the first quarter due to winter weather, but this was an outlier. U.S. land up 30%, so driving that. International revenues down about 8% quarter over quarter, but Latin America looking strong out of Brazil and Mexico. And they did call a bottom for the Eastern Hemisphere in terms of rig count. But they're not looking for significant growth over the 2016 levels. But hopefully no less of an impact there, as rig counts stabilize or grow a little bit into the second half.

Hill: What should investors expect in terms of the business of Halliburton over the next, say, three years, and how much of it should be tied to the price of gas? Because this is a stock that had done so well for so long, and like everybody else, affected by the price of gas. You among others said on this show, "If anyone is built to withstand a downturn in the price of oil, it's Halliburton."

Muckerman: Yeah, it certainly is, and it has shown that. The price has rallied back quite significantly. Even in the downturn, it was there to support its customers, giving them price cuts, and even helping finance some of the drilling that these companies were trying to do through Halliburton. They showed good faith to their most loyal customers, and I think they're going to be rewarded for that. Granted, they need to now increase their prices a little bit. Not too dramatically, because oil prices are still pretty subdued. We've seen some supply worries, so prices are now back below $50. But, for this company, near term, definitely some adjustments to be made, you're bringing a lot of equipment back online, they've talked about hiring a lot more people coming up. Margins did get impacted by that a little bit in the first quarter here. So, I would look for them to maybe not try to get out ahead of themselves too much, because as you can see, price of oil isn't set to rise too dramatically in the near term. But North America drillers, still very ravenous appetite to drill. And this is the company that's servicing them. So, I have very high hopes for this company over the next three years, but don't get too far ahead of yourselves in the near term.

Jason Moser: Yeah. We actually sold Halliburton from MDP not too terribly long ago. It was a good investment for us. We made some money with it. But part of it was based on just that -- we don't see that catalyst taking oil prices a whole heck of a lot higher over the course of the coming couple of years. That's the proxy we use to see how these guys are doing. I've been of the thought that, we would certainly see oil prices bounce back to $50 to $70 over the coming five years, simply because of the supply and demand dynamics at play here. I'm becoming a little bit more skeptical that may be the case, because we're seeing a lot of consideration for other alternatives out there. Really, I think Tesla has made a lot more progress here to this point than a lot of people probably thought they would have. They're obviously not selling the same amount of cars as Ford and GM are, but they are making a lot of progress. And I think maybe the mindset is such that there are alternatives out there, it does matter, a lot of people are getting on board with alternative energy. I can't help but wonder if these oil plays aren't necessarily going to get back to those days of $70 to $80 oil. If they don't, how much upside can we really expect from them? And Halliburton is certainly a big player in the space, one of the biggest. I think the Baker Hughes deal being called off probably ...

Muckerman: Yeah, crimped their style just a little bit. Yeah, lost a few billion dollars. But yeah, to your point, oil prices are still suffering, and that's with OPEC at 99% compliance of their announced cuts last November, which is unheard of for OPEC. Their average compliance, generally, is in the 75% to 85% range. They're at 99% right now, and it's still not affecting the price of oil to the upside. So, I expect another cut from them, or at least to maintain their cut after the six month review period, which is coming up pretty soon. I expect them to maintain or maybe even cut a little bit more, because oil prices are still not where they need to be for those OPEC countries to sustain their government spending habits.