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Halliburton (NYSE:HAL), the world's second-largest oil field services company, is expected to report its second-quarter earnings on July 22. Although the firm's performance over the last few quarters has been hit by a weak North American land drilling market, its international and U.S. offshore operations have fared reasonably well. In Q1, revenues remained flat year over year at around $7 billion, while income from continuing operations (excluding one-time items) fell by around 24%.

While Halliburton's management has indicated that a recovery in North America could be imminent given its improving efficiencies and cost control, some recent cues from the broader U.S. drilling market haven't been so encouraging. Gas-directed drilling in the U.S. fell to an 18-year low this quarter, and the pressure pumping market also continues to be oversupplied. Here's a quick rundown on what to expect when the company releases earnings next Monday.

Fracking Market Expected to Remain Dull, Pricing Could Continue to Be Tough

Fracking Market Will Remain Difficult, but Lower Costs Will Help: Among the oilfield services companies we cover, Halliburton has the greatest exposure to the North American market (56% of its 2012 revenues came from the region). The firm also has a much greater exposure to the natural gas market since it is the world's largest provider of hydraulic fracturing and pressure pumping services. Over 40% of its revenues came from this product line last year. The market for hydraulic fracturing services in the U.S. has been hit by lower gas drilling and an excess of pressure pumping capacity. This caused prices to decline by around 15% last year alone, and we believe that this quarter could continue to be challenging, given the declining trend in the U.S. natural gas rig count.

While smaller fracking players like Nabors Industries (NYSE:NBR) have already warned that their Q2 results would be hit by the oversupplied market, we believe that Halliburton could be relatively better off due to its advanced fracking technology and economies of scale. Additionally, the firm could also benefit from lower costs for guar gum (a key raw material used in the fracking process), an increased adoption of pad drilling, and a growing number of 24-hour operations.

New Technologies and Increasing Drilling in the Gulf of Mexico Will Aid U.S. Offshore: Drilling activity in the U.S. Gulf of Mexico has been on the uptrend over the past year, with the rig count in the region recently hitting a four-year high of around 57. The increasing offshore activity is likely to have a positive impact on the firm's results. Additionally, since many rigs in the region are moving from drilling toward completion cycles, it should help Halliburton's completions and production business. Halliburton has also been deploying new and more differentiated technologies in the Gulf, which should help to improve its competitive advantage. For example, the company recently deployed an enhanced single-trip multi-zone stimulation for some of its customers in the Gulf. This stimulation technology potentially saves operators weeks of rig time and should help to improve the economics of ultra-deepwater wells.

International Operations: Unconventionals in the Spotlight

Halliburton's international business performed relatively well in Q1, thanks to increasing sales for its drilling and evaluation product line as well as growing demand from Asia and the Middle East. Revenues and operating income during the quarter grew by around 21% year over year. While we largely expect the international operations to continue to perform well, we will be watching the company's progress in the global unconventional plays space.

Halliburton is recognized as the market leader in services for unconventional plays in North America. The international market for unconventional plays on the other hand is still largely untapped and provides a promising growth opportunity for the company. Over the last year, the firm expanded its service footprint, catering to some of the first commercial unconventional wells in Australia and China, and has also stepped up unconventional plays business in markets like Saudi Arabia, Mexico, and Argentina.

While we will be watching Halliburton's progress in continuing this expansion, we do not expect the progress to be rapid since most countries are only drilling exploratory wells and full-scale commercial production could still be several years away. However, we believe that it is important that the company continues to bag more early stage contracts in order to understand the markets and geologies, and also to build up relationships that should help it scale up over the long run.

Disclosure: No positions.

Source: Halliburton Q2 Preview: Fracking Efficiencies, U.S. Gulf Of Mexico, Int'l Operations Crucial