Halliburton Company (HAL +1.51%), the world's second largest oilfield services provider, surged to an all-time high of $63.88 after the company reported better than expected quarterly results and forecasted 25% sequential growth in earnings in 2Q. The company reported 1Q14 operating EPS of $0.73, topping Wall Street estimates of $0.71 by 3%.
Best positioned in North America
Halliburton is the leading provider of completion services and the market leader in North America. Driven by a combination of improving utilization, lower costs, and a surging Gulf of Mexico, North American margins are once again on the rise. In this favorable environment, the company appears best positioned in the group.
Halliburton communicated a much more optimistic North America market outlook compared to relatively cautious commentary by the company's competitors Schlumberger (SLB +0.01%) and Baker Hughes (BHI +0.00%). Halliburton's CEO, Dave Lesar, said that he feels the momentum is turning positive and he can actually see it happening .
While the company's North American operations were affected by cold weather in January and February, Halliburton witnessed a surge in activity in March and this has carried over into April. Hydraulic fracturing capacity tightened faster than expected and the company now believes that it will be working at full utilization through 2014. Halliburton expects margins to improve sequentially and approach 20% by year-end.
Better than expected international markets
In addition to the strong North American recovery, Halliburton's international operations are also looking very promising. Latin America in particular looks better than many were expecting. While the company continues to face challenges in Brazil, Halliburton successfully won $3 billion in IPM contracts in Mexico. Mexico, combined with increased unconventional stimulation and cementing activity in Argentina, more than offset the Brazilian issues.
As a result of its multi-year capital investment program abroad, the company is also seeing growth in other international markets. Led by Saudi Arabia, which witnessed year-over-year growth of 50%, the Middle East/Asia region is projected to be the biggest source of growth for the company in 2014. Finally, its Eastern Hemisphere activity is also progressing as the company expected. Halliburton continues to expect low double-digit Y/Y growth in Eastern Hemisphere revenue, with margins averaging in the upper teens. As the company's international revenues and margins are expected to move higher, Halliburton should continue to post strong results in the coming quarters.
Halliburton bought back $500 million worth of shares in 1Q14. Since this time last year, the company has bought back 11% of its shares outstanding and raised its quarterly dividend by 67%. The company remains confident in its business prospects and has signaled that investors should expect more buyback and dividend increases in 2014.
No update on pricing strategy
Following the industry lawsuit on pressure pumping pricing collusion, Halliburton's management remains reluctant to provide any update on pricing strategies and understandably so. However, the management's bullish comments on the U.S. market suggest that pricing gains are possible later this year. With the kind of exposure that Halliburton has to the U.S. completions market and the upside potential to normalized margins, the magnitude of the upside is significant. As a reminder, Halliburton, Schlumberger, and Baker Hughes are accused of anti-competitive behavior in which the firms allegedly colluded to manipulate the hydraulic fracturing services market.
"The class action complaint alleges that major oilfield services companies conspired to manipulate the market for pressure pumping services, in order to muscle out smaller, independent providers," according to a statement from Burleson LLP, a law firm that specializes in energy matters.
"The suit generally asserts that the Defendants communicated and agreed upon a reduction in output and an increase in prices. As a result of the allegedly anticompetitive activity, the market share of major hydraulic fracturing companies increased – along with their profits – at the expense of their customers and to the exclusion of smaller, independent competitors," according to Burleson's statement.
The Department of Justice is reviewing emails and other documents to determine if service providers communicate pricing information to each other either directly or indirectly. Ironically, industry pricing experienced a sharp decline over the past two years and remains far below peak levels. Due to the investigation, investors will no longer get regular updates from the service companies on pricing trends.
Bottom line
With the reacceleration of the North American market firmly taking hold, Halliburton, being the market leader in North America, remains the best positioned stock in the group. Despite weather disruptions, North American revenues posted 2% sequential growth and revenue growth for the remainder of the year should be very strong. Moreover, the company also has the biggest international project pipeline in its entire history, which should contribute further to earnings growth this cycle. Despite a strong share performance YTD and offering leverage to the powerful combination of a North American recovery and continued solid growth in international activity, the company continues to trade at a discount compared to its closet peers and offers an attractive entry point.
