Late last week, oil services firm Halliburton (HAL) reported fantastic fourth quarter results. Revenue jumped 3% year-over-year to $7.3 billion, easily exceeding consensus estimates and the best quarterly result in the company's history. Adjusted income from continuing operations was $0.63 per share, a few pennies higher than expected, but down significantly from a year ago.
Margins in the Completion and Production (C&P) segment improved sequentially, but declined well over 1,000 basis points year-over-year to 13.9%. International results were excellent, with operating income growing 43% sequentially in Latin America, 22% in Europe/Africa, and 55% in Middle East/Asia. However, operating income in North America, Halliburton's largest segment, fell 26% sequentially due to seasonal factors, as well as pricing and cost pressures. Yet, management seemed somewhat optimistic about the North American C&P segment heading into 2013, noting:
Shifting to North America, 2012 was a very challenging year for the industry. Operations we'e impacted by headwinds such as guar costs, pricing pressures and a significant drop in the natural gas rig activity. However I want to be clear before you listen to the rest of the presentation. We believe that the fourth quarter marked the bottom for U.S. land margins, and Jeff and Mark will tell you why we believe this.
Management's argument anchored on the notion that other players will act rationally and not add capacity to an already oversupplied pressure-pumping market. While the firm doesn't see margins improving in 2013, it does believe it could mark the end of downward pricing and a slow advance toward market equilibrium could begin. Though we see the logic behind the argument, we remain cautious as energy producers have shown a willingness to act irrationally in the past.
Drilling and Evaluation revenue increased 5% sequentially to $3 billion, with operating income jumping 13% sequentially, to $484 million. As with the C&P segment, earnings growth at foreign operations outpaced a declining North American market. Operating income in the firm's international operations is expected to decline sequentially due to seasonal adjustments, but the long-term investments in these foreign markets appear to be accretive.
Overall, we liked the quarter, as well as some of the firm's innovations in fracking technology that helps boost drilling activity. The margin outlook for 2013 isn't great, but the firm is reducing capital expenditures by 16% in 2013, so free cash flow generation could be fantastic. Still, Halliburton scores just a 3 on the Valuentum Buying Index (our stock-selection methodology), so we won't be adding the name to the portfolio of our Best Ideas Newsletter at this time.