If you want to be up to date with what's going on in the oil and gas industry, listening to Halliburton's (HAL -3.04%) quarterly conference calls is a great place to start. As one of the largest oil and gas service providers out there, management has a lot of insight into where the market is going that can help inform your investment thesis. This past quarter was no different. Here are five things management said that anyone with an investment in oil and gas should mull over.
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We deliver
More than anything, investors want management teams to have a decent idea of what the market for their products and services looks like, and to be able to make good on promises. Well, after promising that 2017 would be a good year for the company, CEO Jeff Miller got to brag a bit during the company's spectacular third quarter as many of his earlier predictions and promises came through:
We told you the rig count growth would plateau, and that's exactly what it did. We said our North America sequential revenue would significantly outperform average U.S. land rig count growth, and it did. We told you that our completion and production margins would continue to expand, and they did. We said operators were beginning to optimize as opposed to maximize the use of sand and turn to technology to increase production; this trend held true as we saw average sand per well remain flat sequentially. And finally, we said we would have the highest returns in the industry, and we do as we continue to outgrow our peers and take market share.
One thing in this statement worth keeping track of is Halliburton's comment that it is taking market share. Schlumberger (SLB -0.67%) said it was also taking market share in North America. These are two of the three largest oil services companies in the world with extensive North American presences already. One has to wonder how much more market share either can capture.
Market finally swinging in favor of oil services, at least in North America
Over the past couple of years, it has been a producer's market regarding hiring oil equipment and services providers. There has been so much idle equipment out there that companies have been more than willing to take lower rates to keep assets working. In 2017, though, that has started to change as equipment inventories and available work crews have dwindled. As a result, pricing has begun to swing back in favor of the service providers, which Miller says is going to allow Halliburton to raise prices and juice returns:
The North America completions market remains tight and we continue to push pricing across our portfolio every day. Demand for our completions equipment and service quality remains strong. The improving oil price outlook provides runway for us to increase our portfolio pricing as we go forward. So, let me be clear; we still have the ability to push price.
The wave of sand is cresting
Frack sand producers have been banking on a significant uptick in demand next year and have been investing heavily in new mines. According to most sand producers, demand in 2018 will be somewhere in the 90-100 million ton per year range. Miller seems to think otherwise:
During the third quarter, total sand volume for Halliburton continued to increase, but our average sand per well remained sequentially flat. Data points from the last two quarters and my discussions with customers indicate customers are focused on cost-effective production. They hear a lot of conflicting anecdotes about sand used today, because they are based on individual operators and individual basis. But the facts are, for Halliburton, sand per well was down in the Bakken, Rockies and Northeast, and it was up in the Permian Basin. This happened because customers that know the production characteristics of the reservoirs have streamlined their operations to focus on cost per barrel of oil equivalent and are optimizing sand utilization. Conversely, those customers that are still drilling the whole acreage or exploring production boundaries at their reservoirs are continuing the pump jobs with higher sand loads.
There is a lot to unpack in this statement for frack sand producers. One is that perhaps all of this additional production capacity may be too much, too soon. That could lead to oversupply and a decline in sand prices, which sand producers wouldn't enjoy. The other thing is that having sand in the Permian Basin will be imperative, which seems to justify every company's obsession with getting a mine in the region to cut down on transportation costs. If overall drilling activity picks up in 2018, then flat per well sand consumption may not be a big deal, but it is indeed something worth watching.
Still no good word on the international markets
Even though we've seen a considerable pickup in North American drilling activity, Miller seems to think that we're still a ways away from a significant rebound in the international oil market:
Our customers around the world have different breakeven thresholds and production requirements that all face the headwinds of the current commodity price environment. Due to lower cash flow and project economics, they are more focused than ever on lowering costs. The result of this combination is less activity and more pricing pressure.
Production sharing? No thank you
This past quarter, Schlumberger has received a lot of questions from analysts about its recent acquisition of 600,000 acres of drilling rights in Canada. Schlumberger has a production management program that develops a reservoir for a producer in exchange for a percentage of profits. Schlumberger seems to think this is a model that helps to balance its portfolio of oil services. Miller, when asked whether Halliburton is interested in doing something similar, responded with this:
This is -- for us, we call that integrated asset management, and it is really a capital allocation question; it's where do we put our capital and what will make the best returns. And so -- and along with those better returns, my view, a key part of that is asset velocity and to produce returns for shareholders. So, we're not going to tie up our cash and things that we think had longer duration and likely lower returns. We have done some smaller deals, we've done a few things, we understand this space. And when we do it, we'll do it with other people's money to maintain those kinds of returns.
Asset velocity is Miller's way of saying he wants the company to have lower capital obligations for the company and a more asset-light approach. This means lower numbers of equipment and crews that execute jobs more efficiently and quickly move from job to job. For Halliburton, this means higher rates of return for each individual crew. Investing in production management or integrated asset management programs can tie up a lot of capital for a long time, which can be a hamper on returns, but can provide longer-term cash flows. Perhaps it is a future model for oil services companies. At this moment, though, Halliburton doesn't seem that interested.
