Halliburton’s Dream Run Continues

Halliburton strikes gold; profit rises 20% on heightened drilling.

Jan-e- Alam
Jan-e- Alam
Jul 22, 2014 at 10:57AM
Energy, Materials, and Utilities

The global oilfield services business is operating at record levels of activity and revenues are expected to grow at a CAGR of ~12% between 2014 and 2019. North America, which has the largest share of the global oilfield services industry with 52%, is expected to lead this growth. Halliburton (NYSE:HAL), which is North America's top oilfield services provider, is well positioned to benefit from this surge in demand.

While all of the four major players, Halliburton, Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI), and Weatherford (NYSE:WFT), should benefit from this turn in North American demand, Halliburton, due to integration of technologies and capabilities, excellent execution, and significant efficiency programs that are driven by a ROIC-focused culture, should be able to grow its revenues considerably faster than the nominal growth in rig count.

Robust North American activity
The company reported 2Q14 operating EPS of $0.91, in line with consensus estimates of $0.91. The second largest oilfield services provider in the world reported a better than expected increase of 10% in revenues. Halliburton's strong results signal an industrywide recovery in the region following a two-year slump.

Halliburton generates nearly half of its revenues from North America and expects its margins to increase to 20% in 3Q14 from 18.2% in the second quarter. Halliburton's strong North American position is also evident from its peer-leading margins in the region (Baker Hughes' North American margins come in at 12%, Schlumberger at 18.2%). 

Prices to increase after a two year slump
Halliburton and peers in the past couple of years flooded the market in response to a surge in demand for fracking. However, the flood may be coming closer to equilibrium. After a decline of two years, prices are expected to increase by 2% this year and another 4% next year. 

Halliburton's decision to add fracking equipment and crew to take advantage of higher demand in North America also signals an industrywide recovery in prices after a two-year decline. This is a vote of confidence from Halliburton that demand is on its way back as the industry burns through excess capacity that has kept prices low.

The company also increased its share buyback authorization by an additional $4.8 billion to $6.0 billion (10% of market cap). This also shows that the company remains confident about its future prospects and cash flow generation ability. 

Latin America was a drag, Russian impact minimal
While North America reported impressive results with increasing margins, Latin America was a drag because of delays in recognition of revenues associated with the company's blanket consulting contract in Mexico. A delayed order, reduced activity, and costs related to the company's new projects in Mexico dragged down revenues in Latin America (increase of only 4%). However, Halliburton expects performance to improve sequentially, with full year margins in line with the previous year. I believe Latin American issues are temporary and the region should improve in 2015 and 2016.

Both Halliburton and Baker Hughes have said that so far there has been no impact of any of the sanctions against Russia. However, projects being tendered later this year could be affected should the scope of sanctions change. Commenting on Russia, the CEO David Lesar said, "As tensions potentially escalate and the risk of more sanctions sort of looms, that's what we believe puts some risk into the business in the back half of the year." 

Integration in the oilfield services industry
Halliburton should also continue to benefit from integration in the oilfield services industry -- probably the hottest topic in the industry today. The picture between oil companies and services providers has changed over the years. Previously oil companies used to ask services providers to lower their prices to improve the oil company's bottom line.

Now, however, oil companies are focused more on costs and require oil service providers to improve oil companies' returns in terms of cost per barrel of oil. The need for better returns drives oil companies to use fewer suppliers and have those suppliers develop products and services in an integrated fashion, which improves efficiencies and returns for both the oil companies and services providers.

Bottom line
Halliburton reported an in-line quarter. Given the year-to-date rise in the stock price (up 41%) the market would have liked a beat, but the underlying operational results excluding Latin America were very strong, and that should appease the market. After two years of a falling market for fracking services due to oversupply, equipment prices in the U.S. are expected to increase by 2% this year and another 4% in 2015. Halliburton, which is North America's top oilfield services provider, is well positioned to benefit from this turn in demand.