Creating Margin Growth in North America

The past year has been tough on oil-field service companies operating in North America. A significant drop in natural gas rig activity and pricing pressures have squeezed margins. Looking to 2013, Halliburton (NYSE: HAL  ) expects margin growth in North America. In fact CEO Dave Lesar believes North American margins bottomed in the fourth quarter of 2012, but that's just one reason the company expects margins will begin to expand over the next year.

The company has been working on two internal initiatives focused on cost optimization. Those initiatives -- "Frac of the Future" and "Battle Red" -- both had upfront costs which squeezed margins in 2012. However, that pressure should abate toward the middle of 2013 as the projects begin to deliver. 

The projects were just two of the several tactical decisions Halliburton made to position its business for higher future profitability. The other big pressure on margins was that the company stood firm on maintaining a strong presence in the North American natural gas markets. By doing so, it was able to strengthen its relationships with customers as competitors pulled out. While too many investors focus on short-term numbers, Halliburton's focus should reward those who see the big picture.

Another area where Halliburton should see relief is in guar cost. The seed of the guar plant, which when crushed into guar gum powder is used in making everything from ice cream to diapers, also serves as an important ingredient used in fracking. Market prices for guar shot up in 2012 but are expected to moderate in 2013.

While a moderation in guar prices will help improve Halliburton's margins, the price of guar is still expected to remain above historical levels. That, too, benefits the company as its proprietary PermStim fracking fluid will be seen as a more compelling economic alternative which will boost margins even further. By having multiple ways to win, Halliburton is positioned to deliver excellent results as the market improves.

The company's investments in the future are beginning to show signs of paying off. The new Q10 fleets now entering service deliver the same capabilities as a traditional fleet, with up to 20% fewer trucks on location and with fewer personnel. This enables the company to see marked improvement in well site efficiencies, thanks to an improved operating cycle and a reduced maintenance profile.

The company also just introduced its first dual-fuel Q10's into the field. These units use both diesel and clean-burning natural gas. Halliburton has been working with Caterpillar (NYSE: CAT  ) and Apache (NYSE: APA  ) on these duel-fuel engines. According to Apache, last year the industry used 700 million gallons of diesel fuel in fracking operations which equates to $2.38 billion in fuel costs. By using natural gas it estimates that fuel costs would be reduced by 70% or by $1.67 billion. 

Halliburton isn't the only oil-field services company working on using natural gas to power fracking operations -- Schlumberger (NYSE: SLB  ) is also working with Caterpillar and Apache. The dual-fuel engine kits developed by Caterpillar run on diesel while idling but are fueled by natural gas when throttled up for pumping operations. The main difference is that the Halliburton model uses liquefied natural gas while Schlumberger is using compressed natural gas.

These new technologies, when fully deployed in the field, will create margin growth not just for Halliburton, but for its customers as well. These are customers that are more loyal than ever to the company because it didn't ditch them during the downturn. All told, 2013 looks to be a great year for Halliburton.

Does that mean that Halliburton is a buy? As this market looks to rebound, investors would be wise to drill down even deeper into Halliburton and discover if it truly is the best in the business and if it is the oil-field service company most likely to profit as North American drilling activity picks up. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.


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