- Quick Take
- Halliburton’s Q1 revenues remained flat year-over-year at around $7 billion while income from continuing operations (excluding one-time items) fell by around 24%.
- The firm took a $637 million after tax charge relating to the Macondo well incident in the U.S. Gulf Of Mexico, resulting in a $13 million loss from continuing operations.
- Despite the year over-year decline, we think the results are still quite encouraging on a sequential basis thanks to better efficiencies and lower costs in North America.
Halliburton (NYSE:HAL) published its Q1 2013 earnings on Monday, reporting a relatively encouraging set of numbers. While the results continued to be weighed down by weak completion and production activity in North America, a better international performance and improved operational efficiencies partly helped to bolster results. Quarterly revenues remained almost flat year-over year at around $7 billion while income from continuing operations excluding one-time charges was around $624 million, down by around 24% year-over-year. However, a one-time provision of around $637 million (after tax) relating to the Macondo incident in the U.S. Gulf of Mexico resulted in a loss from continuing operations of around $13 million. (Halliburton SEC Filings) Here are some of the key takeaways from the earnings release.
North America Continues To Pull Results Down But The Outlook Is Improving
Among the oilfield services companies we cover, Halliburton has the greatest exposure to the North American market with around 56% of its annual revenues coming from the region. On a year-over-year basis, the segment’s revenues were down 11% to $3.7 billion while operating income was down by nearly 43%. However, margins improved by around 4% on a sequential basis thanks to lower raw material costs as well as better operational efficiencies.
Fracking Business Helped By Lower Costs: Hydraulic fracturing, one of Halliburton’s most important services in North America, has been a source of margin contraction for the firm over the last few quarters as excess capacity and lower demand from natural gas wells hurt pricing. According to PacWest Consulting Partners, prices for fracking services fell by around 15% last year. This hit the firm’s North American significantly as fracking along with pressure pumping accounts for more than 40% of Halliburton’s overall business.
However, there was good news this quarter due to lower costs for guar gum, a key raw material used in the fracking process. Additionally, the increased adoption of pad drilling and more 24-hour operations resulted in higher service intensity and better operational efficiencies which helped to improve margins.
Gulf Of Mexico Hit Temporarily: Results from the U.S. Gulf of Mexico have been a bright spot for the firm over the last few quarters helping to soften the blow of lower onshore drilling. However, during the first quarter, although the number of active offshore rigs in the Gulf rose by nearly 10% year-over-year, activity was slowed down by maintenance work on deepwater rigs. Despite the temporary slowdown, the firm mentioned that its business in the region will see strong revenue and margin growth for the year.
Gas Drilling Likely To Remain Sluggish: Natural gas prices rose by over 15% during Q1 to levels of around $4 per mmBtu. However, the U.S. gas drilling rig count fell to a 14-year low during the quarter as producers were able to maintain supply from their existing wells. Halliburton expects the outlook for gas drilling to remain lackluster for the rest of the year unless there is a further increase in gas prices.
Pricing Pressure Persists, But The Outlook Is Positive: Halliburton mentioned that pricing pressure continued to exist in services such as cementing, wire line, and directional drilling where there are many smaller competitors in the market. However, it said that it expects pricing to look up over the rest of the year as it focuses on offering more differentiated technologies. The firm expects profitability to further increase this year aided by better pricing and further cost and efficiency improvements. This is in contrast with larger rival Schlumberger (NYSE:SLB),which still sees uncertainty in North American pricing going ahead.
International Operations Do Well
Halliburton’s international business had a very good quarter with both revenues and operating income increasing by around 21% year-over-year due to increasing sales for its drilling and evaluation product line and encouraging sales for its Middle East and Asia operations.
Business Grows In Middle East And Asia: The Middle East and Asia segment saw its revenue and operating income increase by around 25% and 51% respectively year-over-year with markets such as Saudi Arabia, China and Australia driving growth. Saudi Arabia performed particularly well with revenues growing by around 30% and the firm expects the country to remain one of its most significant growth markets for this year.  Saudi Arabia could also prove to be an important market for unconventional energy plays as the country intends to expand its exploratory drilling of shale and other unconventional gas reserves. 
Latin American Business Expands But Margins Drag: Halliburton’s business in Latin America grew by around 21% year-over-year, however, operating income was down by around 11% primarily due to higher mobilization costs for recent deepwater contracts in Brazil and higher costs in Argentina. We expect margins to pick up going forward as the firm begins work on new contracts. Halliburton also made some progress into unconventional plays in Latin America, providing integrated completion services for one of the largest shale wells in Argentina.
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