After two prior quarters of robust revenue growth with little in earnings to show for it, Halliburton's (HAL 0.34%) third-quarter results showed that those with a little patience would be richly rewarded. Another round of revenue growth coupled with expanding operating margins led to a near-500% increase in operating income and better-than-expected earnings per share.
Let's take a look at how Halliburton was able to deliver this great quarter and what investors should be looking for from here.
By the numbers
|Earnings per share
|Free cash flow
Over the past several months, the rate at which new rigs and oil services crews were being deployed to the oil fields has slowed down considerably. It was safe to assume, then, that Halliburton's revenue growth would slow down a bit. That wasn't the case, though, as the company posted another quarter of double-digit sequential growth (14%).
What's even more impressive is that the company achieved that growth rate even though the average U.S. rig count increased only 6%. That suggests either Halliburton is taking market share, or its Canadian operations are picking up fast. Schlumberger (SLB 0.35%) also reported revenue growth in North America (18%) -- significantly faster than the average rig count expansion. That has to make you wonder who is actually losing market share if these two oil services giants are both gaining.
Another encouraging sign for Halliburton was that it saw modest revenue growth across all geographic regions. Neither Schlumberger nor Baker Hughes, a GE Company could replicate that, as the two noted weakness in international markets. Halliburton said that the gains in Latin America were almost all attributed to its operations in Argentina. Halliburton is likely going to be a major player in the country because Argentina is making a hard push for shale drilling, Halliburton's specialty. The one part of the world that didn't perform particularly well for the company was Africa, most notably due to a slowdown in activity off the coast of Angola.
Halliburton's free cash flow remains anemic, but it doesn't look quite as bad as the headline numbers say. This past quarter, the company paid $628 million in cash for Summit ESP, a manufacturer of electric submersible pumps used for artificial lift in mature oil and gas wells. Artificial lift is used to pump oil to the surface after the natural pressure of the well has dissipated.
The company also had higher capital expenditures compared to the prior quarters. Chances are much of that was from getting idle equipment in working order again, and we can reasonably expect that spending rate to decline slightly.
What management had to say
Halliburton's outsize presence in the North American market has been a key factor in the company's revenue growth over the past couple of quarters, but CEO Jeff Miller made a point to say that there's more to Halliburton's most recent performance than just a North American-heavy footprint:
Halliburton is proud to be a service company and we believe our investors and customers appreciate that. I am confident we are working on the right things that create the most value and generate the highest returns. Our strong competitive position is not purely a function of geographic footprint. It is demonstrated in the depth of the products and services that we provide to our customers and use to generate industry-leading returns for our shareholders.
What a Fool believes
Halliburton's bottom-line results for the first half of the year weren't great, but there were signs that things were getting better, as revenue was growing at a blistering pace. This quarter we started to see the impact of that revenue growth as the company put most of its idle equipment to work and margins started to expand. With North American drilling activity slowing down, don't be surprised if Halliburton's revenue gains start to taper off. Hopefully, it will be able to make up for it with expanding margins and increased activity outside the U.S.
Overall, though, things are looking quite good at Halliburton right now. Absent any major change in the current global oil and gas markets, the company should continue to do well for some time.