Halliburton Company (HAL +1.63%) recently reported stronger than expected earnings, which was rather surprising given the weak oil market in the quarter. The oil-field service company's management team highlighted its successes on the company's conference call. Here are five key points the company's management team made on that call.
1. It's a tough market, but we're doing well
Halliburton CEO David Lesar summarized the company's thoughts on the quarter at the end of the call by saying,
[...] There's no question that this is a tough market. And in markets like this, Halliburton's operational execution becomes an even more valuable source of differentiation, which was demonstrated by our second quarter results. And I'm confident that our team will stay dead focused on delivering both best-in-class service quality.
While the oil market is tough, Halliburton is performing admirably. One of the key stats that demonstrated just how well Halliburton's results were can be found by comparing its revenue decline to the rig count decline. Earlier in the call Lesar pointed out that, "revenue for North America was down 25% sequentially, significantly outperforming the 40% decline in the average rig count." He chalked up the company's outperformance as a "flight to quality" by customers, which is why its margins also held up surprisingly well. Overall, the company's "decremental margins this quarter were better than previous cycles" according to Lesar, which he says is the result of its "aggressive cost-reduction initiatives" enabling the company to "offset the current market challenges." Said another way, Halliburton is managing the downturn admirably.
2. We are employing a two-pronged approach
Throughout this downturn the company has continued to "employ a two-pronged approach" according to Lesar. The first prong is to look,
[...] Through this cycle to ensure that we will accelerate our growth when the industry recovers. To do this, we continue to invest in key technologies, build out capital equipment and prepare for our pending acquisition of Baker Hughes (BHI +0.00%).
While times are tough, Halliburton hasn't taken its eye off of a future recovery. It has positioned its business to accelerate growth by being proactive, including swooping in to pursued rival Baker Hughes to join forces early on in the downturn so that the combined company emerges even stronger.
While the company is planning for the future, it's not dismissing the current tough market. Lesar noted that,
The second part of our approach is managing through the downturn, drawing upon our management's deep experience in navigating through past cycles. We are aggressively lowering our input costs, eliminating discretionary spending, managing our business within our cash flows and protecting our market position.
He points out that the company has been aggressive to manage its business during the downturn and that has paid off as evidenced by the company's solid second-quarter results.
3. We're still very excited about the Baker Hughes merger
Lesar spent a lot of time on the call addressing the company's pending merger with Baker Hughes. He detailed the progress that the two companies have made with regulators as well as the progress being made on divestitures that will need to be completed to close the transaction. While the transaction is taking a while to complete, he reaffirmed that the company is "fully committed to our target of closing the acquisition in late 2015, though the acquisition agreement does provide that closing can be extended into 2016, if necessary." Further, he reminded investors that the company is still "confident we can achieve the cost synergies of nearly $2 billion regardless of market conditions or any cost-reduction actions taken by either company to that date." Bottom line is that the company is very excited to be acquiring Baker Hughes.
4. Here's what we see in the near-term
While the company is working to close the Baker Hughes deal, Halliburton is concurrently working to manage through the downturn that looks to be starting to moderate according to comments made by acting CFO Christian Garcia. He said that,
In North America, if we extrapolate the current rig count forward, it suggests that the average rig count for the third quarter should decline by at least 5% compared to the prior quarter. This, in combination with a full quarter impact of lower pricing, leads us to believe that revenues and margins in the third quarter will be under pressure. This pattern is consistent with previous cycles where we typically see at least a one-quarter lag when the market is transitioning toward the bottom. Based on our visibility today, we're currently expecting a low single-digit decline in sequential revenues with margins also drifting modestly lower.
As Garcia points out, the company expects its third-quarter results to be a bit weaker than this past quarter. However, this isn't alarming as this is typically what happens as there is usually a one quarter lag at the bottom. That said, a bottom is a welcome sign given how deep this downturn has been for the industry.
5. Uptick possible in 2016
While Halliburton expects its third-quarter results to represent the bottom of the cycle, it's not optimistic about a forth-quarter recovery. Instead, according to CEO David Lesar, "we are not expecting a meaningful activity increase until sometime in 2016 depending on the pace of production declines and where commodity prices settle out in the coming quarters." Still, to have some visibility that the market is about to turn the corner over the next year is good news for the oil industry as it suggests that there are much better days ahead.
Investor takeaway
Halliburton is managing the downturn very well. Its revenue and margins are holding up quite well as the company has not only aggressively managed costs, but it has seen a flight to quality from customers. Looking ahead, the company sees signs of a bottom forming with a possible uptick in activity in 2016. The company believes it is well prepared to see an acceleration in its business when that recovery begins as it should have closed its Baker Hughes acquisition by that time, which will put it in a strong position to thrive in the recovery.
