Halliburton Company Means Business in North Americahttp://www.fool.com/investing/general/2014/01/28/halliburton-company-means-business-in-north-americ.aspx Callum Turcan
January 28, 2014
There are those who can no longer crank out additional cost savings, but this oilfield-services company is defying the talking heads on CNBC. By renovating its assets, Halliburton (NYSE: HAL) was able to grow income from continuing operations for the quarter by 7.1% year-over-year to $798 million, with revenue for the full year up 3%. Driving the income gains was a more effective business model, aided by a sharp jump in the North American operating margin.
Hey natural gas
Through its "Frac of the Future" program, Halliburton was able to upgrade and significantly improve its pressure-pumping operations. For instance, the Q10 pump can run on natural gas, which reduces operational costs at the well site. It also vibrates less than traditional pumps, making it more reliable and prolongs the life of the pump.
Natural gas usage can also save Halliburton money in other ways, as it adds 100 natural-gas powered trucks to its North American fleet. Each truck saves Halliburton $5,100 annually and produces 90% less pollution than a diesel- powered truck.
Through these initiatives, Halliburton was able to boost its North American operating margin from 12.3% to 16.8% in just one year. Due to North America being roughly half of Halliburton's revenue, this leap pushed the overall operating margin up to 15% from 13.5% a year ago.
Investors should also be content knowing that Halliburton is in the early stages of its corporate shakeup. Management has guided for a 200 basis point improvement in the North American margin this year, aided by cheaper fuel costs via natural gas.
Higher margins equate to shareholder-friendly practices
Gulf of Mexico
BP (NYSE: BP), in particular, is spending $4 billion a year over the next decade to grow output from the Gulf of Mexico. At the end of 2013, BP added two new deepwater rigs to its Gulf operations, growing its total fleet to nine. The reason BP is adding new rigs to the area is so it can develop its four major operating hubs: Atlantis, Mad Dog, Na Kika, and Thunder Horse.
One of those rigs is coming from Seadrill (NYSE: SDRL)-owned Seadrill Partners (NYSE: SDLP), which signed a deal with BP for its West Auriga ultra-deepwater drillship. Seadrill Partners is a huge beneficiary of BP's ramp-up in drilling activity for a few reasons.
BP's plan to spend at least $40 billion over the next decade is boosting demand for ultra-deepwater offshore rigs. Rates for those rigs can run around $650,000 a day, which is why Seadrill Partners is smart to lease out one of its most valuable assets to BP. When a company as big as BP boosts demand in a niche market like ultra-deepwater rigs, rates usually go up, which is a huge boon to Seadrill Partners.
The West Aurgia is going to be in constant use due to BP's aggressive and extensive growth plans for the Gulf, providing continuous cash flow to Seadrill Partners and thus, Seadrill. To maximize cash flow generation from leasing out offshore rigs, Seadrill formed the MLP Seadrill Partners to become tax efficient. When Seadrill Partners' free cash flow increases, a large chunk of that lands in the laps of Seadrill's shareholders.
Halliburton in the Gulf
After Halliburton and its partner find recoverable resources, drilling begins. Halliburton monitors rig activity on the seabed through its MaxActivity Rig Floor Activity mon