Will North America Continue to Hold Back Halliburton?

Halliburton (NYSE: HAL  ) , the Houston-based oilfield services company, had a stellar year, with shares up more than 40% in 2013.

In the first nine months of 2013, the company generated revenue of $21.8 billion, up $550 million from the first nine months of 2012, due largely to strong performance from its international operating regions including Russia, the North Sea, and Angola.

Yet shares have slumped by nearly 10% since reaching a high in mid-November on concern that its North American business will continue to face weakness amid excess supply in the pressure pumping market.

Let me explain why I believe this is only a near-term setback, and why Halliburton's North American segment is well positioned to deliver in the years to come.

Weakness in North American market
Though Halliburton reported strong international results in the third quarter, the company's North American performance significantly lagged its peers, due largely to continued weakness in the North American pressure pumping market. The company's third-quarter North American revenue fell 2% year-over-year to $3.9 billion, while margins declined by 60 basis points from the second quarter to 16.9%.

By comparison, peer Schlumberger (NYSE: SLB  ) delivered 9% year-over-year growth in North American revenue, which came in at $3.6 billion in the third quarter, while Baker Hughes (NYSE: BHI  ) saw its third-quarter North American revenue grow 4% year-over-year to $2.85 billion. Meanwhile, Weatherford (NYSE: WFT  ) reported third-quarter North American revenues of $1.6 billion, down 7% year-over-year but up 4% sequentially. However, all three companies saw an improvement in margins due to the seasonal rebound of activity in Western Canada, among other reasons.

Will North American headwinds continue in 2014?
As you can see, Halliburton's relatively large exposure to North America proved to be a major headwind in 2013. But even though the company expects pricing pressure in the North American pressure pumping equipment market to continue over the next quarter or so, there a couple of factors working in the company's favor that should help boost North American margins by the second half of 2014.

These include the trend of increasing efficiency and an expected acceleration in North American onshore and Gulf of Mexico upstream activity next year. According to a recent report by Barclays, North American upstream spending will grow by 7% next year, up from 2% growth this year, led by an increased focus on drilling, evaluation and completion activity.

Both are great news for Halliburton, which is a leader in providing high-tech drilling, evaluation and completion solutions that allow firms to be more capital efficient. The company's "Frac of the Future" and Battle Red initiatives, which are being rolled out now, are especially noteworthy, as they should further cement its strong leadership position in North American unconventional drilling.

Frac of the Future aims to maximize productivity from oil and gas plays, while minimizing down time and optimizing operator returns on investments. Halliburton has already rolled out the program in over 20% of its fracking fleet, helping deliver 30% reductions in maintenance and crew costs. Similarly, Battle Red aims to digitize the company's operational flows from drilling to completions, and should help the company improve its cost structure by lowering its working capital requirements.

Another area that should drive growth for Halliburton's North America segment is the U.S. Gulf of Mexico, where activity has rebounded significantly and is expected to grow rapidly, with more than a dozen deepwater rigs scheduled to begin drilling in 2014. Furthermore, with Gulf activity shifting from drilling to completions, Halliburton finds itself especially well positioned, thanks to its leading market share in completions and the recent expansion of its Gulf presence through the deployment of an intervention vessel and a stimulation vessel.

The bottom line
Even though Halliburton expects the North American pressure pumping market to remain oversupplied in the very near term, the projected increase in North American onshore and Gulf of Mexico spending should support margins, especially in the second half of 2014. In addition, Halliburton's expanded presence in major international markets such as the Middle East, Russia, the North Sea, and Angola and its high-tech integrated solutions should ensure strong demand for its products and services in 2014 and beyond.

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