Halliburton Company (NYSE:HAL) recently reported strong fourth-quarter results despite the weak oil market. That weakness, however, is expected to impact the company over the next few quarters, management said on its most recent conference call. That said, one overarching theme on the call was management's firm belief that this short-term pain will yield much stronger long-term gains.
Tough times ahead
CEO Dave Lesar was pretty open with investors on the call that the company sees pain ahead in 2015. He said the company's margins are sure to contract, as customers are now demanding price reductions from oil-field service companies.
Price discount discussions with customers did begin in the fourth quarter and have accelerated over the past several weeks...And price reductions are now occurring across all product lines.
These price discounts could get much worse as some companies refuse to drill new wells until oil-field service prices come down by 40%. "[W]e have to be real about it," the CEO said. "The North America market is going to see volatility and pain for a few quarters."
Entering the downturn from a position of strength
However, unlike so many other oil-related companies, Halliburton is entering the downturn from a position of financial strength. Lesar noted that 2014 was a record year for both of its divisions, as 12 of its 13 product lines set new all-time highs while new full-year operating income records were set across four product lines.
"You want to head into any industry downturn starting from an extremely strong financial and operating platform, and that certainly is where we are performing today," Lesar said.
Added acting CFO Christian Garcia: "We finished 2014 in a solid financial position."
When the market might turn
While Halliburton's management is bracing for pain over the next few quarters, it does not see the oil market staying weak forever. Instead, executives' view is that the current downturn is similar to past downturns.
"We can look at previous cycles for insight. And while history doesn't always repeat, sometimes it rhymes," said Halliburton President Jeff Miller. He added that the trajectory of the falling rig count in the U.S. "is similar to both the 2001-2002 cycle and the 2008-2009 cycle. And in those cases we experienced a rapid correction to the rig count going from peak to trough over a three-quarter period." This suggests the market could begin to turn in the second half of this year.
Thoughts on Baker Hughes merger
Even amid the short-term market issues, Halliburton remains focused on driving strong results over the long term, which is why it is merging with rival Baker Hughes (NYSE:BHI).
Halliburton "believe[s] this combination will create a bellwether oil-field services company; a stronger, more diverse organization with an unsurpassed depth and breadth of services," according to Lesar, who also acknowledged the difficulty of integrating these two giants: "I'm not naive how hard it is to put two companies together."
Lesar, though, has strong leadership in place to work on the integration, and he's confident the team will achieve its integration goals even with the troubles in the oil market. He also remains confident the deal will close in the second half of this year.
Long-term outlook is strong
By entering the downturn with solid financials and then bolstering its position by acquiring a rival, Halliburton is excited about what the future holds when the oil market does turn around. In closing the company's prepared remarks, Lesar said:
Industry prospects will continue to be weak and the coming quarters and the ultimate depth and length of this cycle remains uncertain. However, we are confident that our management team is prepared to meet the challenges that are forthcoming and we will take the opportunity to strengthen the long-term health of our franchise. We will selectively cut costs and at the same time continue to invest where we can improve our competitive position. Whatever scenario you think may happen we have the people, technology and experience to outperform the market. We have demonstrated this to you for the past several years. Whatever the level of industry activity, we expect to get more than our share of it.
Said another way, Halliburton is supremely confident that it will not only manage through the downturn, but it will emerge on the other side as a stronger company.
Halliburton is clearly bracing for a rough year. However, the company sees this downturn as an opportunity to grow stronger. That's why it took advantage of the early stages of the downturn to agree to a merger with Baker Hughes that should establish an even stronger company for when the market returns to normalcy. Bottom line: Halliburton is focused on managing through the weakness of 2015 so it can enjoy the gains as the market improves.