Earlier this month Halliburton (NYSE:HAL) CFO Mark McCollum presented at the Barclays CEO Energy-Power Conference. Even though they don't always contain brand new information, conferences like this serve as a great opportunity between earnings reports to remind the Street where a company has been and what there is to look forward to. And there is a lot to look forward to with Halliburton.
Where Halliburton is going
Back in the conference call on July 24 you may recall COO Jeff Miller stated, "Let's start with surface efficiency. We're seeing record activity levels with year-over-year stage counts up more than 20% and profit volumes per well up about 35%." The record levels Miller was referring to were for the first and second quarter of this year.
McCollum revealed that July was a record month as well. But this is only one aspect of Halliburton's success. McCollum stated:
"So you have the combination of rig count going up, volumes going up across multiple basins across the U.S. has created remarkable year for us. And we've seen again-because of the record levels of activity, we've seen a significant increase in our revenues in the flow-through effect of that increased activity."
He then mentioned that almost 100% of the margin improvement from Q1 to Q2 was due to this flow-through affect.
The double-edged oil sword
McCollum is excited but still wants the public cautioned. With increased volumes come increased costs. It's a good problem to have but it's still a problem. As he put it, "We've actually have some logistics challenges to meet this increase in demand."
As an example the average crew size per location has had to increase between 10% and 15%. Others in the industry have at times seen crew size increases of between 25% and 50%. Labor costs, diesel costs, maintenance costs, and depreciation costs are all going up.
Pass in the buck
The better news in terms of revenue is that between 60% and 65% of Halliburton's contracts with customers came up or are coming up during the second half of this year. Since between 92% and 93% of revenues come from contracts, this is a significant amount, and it's an opportunity to potentially pass the cost increases onto the customers when new contracts are signed.
"We're going to be able to have an open and honest discussion with customers about what they're going to be doing next year, consider what's happening in the market space today, and then make a better estimation about what's going to happen in terms of cost and cost inflation. And that allows us to set pricing in a way that gets ahead of this issue rather than operating from being behind."
A major uncertainty has been deep-sixed
Remember that Macondo blowout from the Deepwater Horizon BP oil spill incident from 2010? The potential penalties and uncertainty have hung over Halliburton for four long years. That risk is no longer. McCollum assured investors:
"The Macondo settlement that was announced today this morning, we're very, very pleased with this settlement. It's $1.1 billion settlement with plaintiff steering committee. It settles the majority of the plaintiff's claims that have been filed against us in the Macondo litigation."
That $1.1 billion is before taxes, so it will act as a tax write-off. The actual expense will be lower, by maybe 30%, depending on Halliburton's tax rate for this payment. What's more is Halliburton already created a reserve estimate for this charge, and the total falls within that reserve (maybe the company will actually show an accounting gain as a result). The cash reserve for this was over-budgeted by half a billion that will now be available for additional stock buybacks.
The conclusion speaks for itself
McCollum wrapped it all like this, and his parting words say it all: "With that, good, solid, strong North America outlook, pleased, growing pains but we are going to get there. Latin America is gaining some momentum. We've got some challenging markets that are going to cost a little bit in the Easter Hemisphere, but still feel very good about the long term outlook there and slow and steady growth. And we still are going to continue to drive to be the highest returning, highest growth business in the energy space."
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.