A superficial look at results for the fourth quarter of 2012 at Halliburton (HAL +0.66%), the second-largest of the oil-field services contingent, would indicate a company with sliding fortunes. But a deeper analysis of the company's quarter, its directions, and its areas of emphasis clearly indicate that the company shouldn't be lightly passed over by those with an appetite for this important sector. Fortunately, the market has taken the latter approach, raising the company's shares by 5% on Friday, following its announcement.
For the quarter, the company earned $669 million, or $0.72 per share, compared with $906 million, or $0.98 per share for the comparable quarter a year earlier. However, if you back out one-time items, the most recent per-share earnings slid to $0.67, significantly lower year over year, but $0.06 above the consensus expectation of the analysts who follow the company. Revenue increased to $7.29 billion, versus $7.06 billion for the final quarter of 2011.
Pressured domestic earnings
As was the case with Baker Hughes (BHI +0.00%), the third-largest member of the services set, whose results were reported two days earlier, Halliburton's overall financial slide in the quarter was precipitated entirely by softness in the North American pressure pumping market. The result was a 22% reduction in operating income generated on the continent, versus the September quarter.
Indeed, as David Lesar, Halliburton's CEO, observed on his company's post-release conference call:
[Looking at] North America, 2012 was a very challenging year for the industry. Operations were affected by headwinds such as guar costs (referring to a thickening agent used in hydraulic fracturing), pricing pressures, and a significant drop in natural gas rig activity. However, I want to be clear...We believe that the fourth quarter marked the bottom for U.S. land margins...
The farther away, the better
Other geographic locations were significantly stronger across the board. In Latin America, for instance, revenue climbed 14% from the third quarter, despite a 2% dip in the rig count. Even more impressively, operating income for the region jumped by fully 25% sequentially. The market area comprised of the Middle East and Asia saw its revenue and operating income improve by 14% and 46%, respectively. Of particular note was increased activity in Saudi Arabia and Australia.
At the same time, a host of factors, including a hike in year-end sales of completion tools in Angola and the North Sea, higher demand for the company's drilling services in the North Sea and Russia, and improved activity in East Africa raised revenue and operating income by 8% and 23% in the Europe, Africa, and the CIS market area. As a result, revenue generated internationally climbed sequentially by 20%, while operation income was up by a solid 39%.
Among the significant events at Halliburton during the quarter was the selection by TNK-BP to provide a package of integrated services to deal with complex tight oil reserves in the Em-Yoga license area of the Krasnoleninskoe oil and natural gas field in Western Siberia. As you likely recall, TNK-BP is a decade-old joint venture that is equally owned by a group of Russian oligarchs and BP (BP 0.04%). Russia's state-controlled Rosneft is expected to complete the acquisition of both halves during the first half of this year.
As Halliburton also noted in its earnings release, in a cooperative effort with independent producer Apache Corporation (APA +0.38%) and heavy-equipment manufacturer Caterpillar (CAT +1.99%), it has developed "dual-fuel technology capable of safely and efficiently powering the pumping equipment used for fracturing...with a mixture of natural gas and diesel." I would only note that it appears that, as I told Fools last week, Baker Hughes has accomplished a similar feat.
A brightening picture ahead
But what is the perspective here for investors with a taste for the oil-field services segment? As Lesar said on the company's call:
[For 2013], we anticipate international customer spend increases in the high single digits, maybe more, maybe less. whatever it turns out to be, the market share gains we've had, we expect our revenue to outpace the increased spending levels. We also anticipate full-year margins should average in the upper teens for 2013. We believe that this above-market growth rate will come from volume increases as we ramp up on recent wins in new projects from continued improvement in those markets where we've made strategic investment in the past several years.
As expected, his prognostication for North America remains considerably more measured. As he said: "For the remainder of the year we expect activity levels to gradually increase, be we are expecting continued pricing pressure as we renew the last tranche of stimulation contracts."
For my money, Halliburton is a solidly managed and technologically sound company that is benefiting from strengthening markets everywhere on its home continent. Beyond that, I've been in and around the oil-field services market for long enough to know that our tendency to extrapolate current conditions ad infinitum is almost never wise.
The North America market will recover, almost certainly sooner than we expect and to a greater degree than we anticipate. On that basis, Halliburton warrants steady monitoring by Fools with the wisdom to maintain a yen for energy.
