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
The shale boom requires Halliburton to offer pressure-pumping services to exploration and production, or E&P, players across the country. Halliburton didn't just sit on its hands and ride the bandwagon, either. It has continued to innovate.
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
To reward loyal shareholders, Halliburton repurchased $4.4 billion worth of shares while boosting its quarterly payout by 67% last year. While share buybacks can be hit or miss, dividend increases are generally a solid sign of financial stability. Halliburton is making it clear that it wants to reward shareholders with higher margins making it possible as revenue growth remains low.
Gulf of Mexico
The Gulf of Mexico is seeing drilling activity steadily increase, with the average rig count up 23.5% last year to 58. Higher levels of drilling activity create a bigger market for Halliburton to operate in and also open up new windows to unearth revenue growth.
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
When oil majors are injecting billions to grow upstream operations, Halliburton is almost always in the picture. In the Gulf, Halliburton offers a wide variety of services such as 3-D seismic imaging and drilling expertise. If Halliburton is able to spot sizable amounts of crude, it's far more likely to win contracts to further develop the area than if it just offered drilling and well-completion services.
After Halliburton and its partner find recoverable resources, drilling begins. Halliburton monitors rig activity on the seabed through its MaxActivity Rig Floor Activity monitoring software. This, among other services, allows Halliburton to offer almost all of what E&P players need to develop deepwater plays and lets Halliburton bring in as much cash flow as possible per well. One thing Halliburton misses is an extensive deepwater drilling fleet, which is why Seadrill and Seadrill Partners are in the mix.
By focusing on unique ways to save on costs, Halliburton was able to push its operating margin higher and drive value creation for shareholders. Guidance for 2014 points toward this trend continuing. As more wells are brought online in shale plays and oil majors further develop the Gulf of Mexico, the industry is opening up new ways for Halliburton to profit.
2014 will see continued margin improvement from the company's North American operations, which is its largest source of cash flow, making this year a year to remember. BP isn't alone in the Gulf, either. Other players like Noble Energy and Chevron are pouring billions into the Gulf and driving drilling activity higher. Halliburton is an innovative company in a booming industry with shareholder-friendly policies, what's not to like?
Offshore rigs like Seadrill's don't just build themselves