Halliburton (NYSE:HAL) reported strong quarterly results on Tuesday Morning, though shares were trading down 1.3% on Tuesday morning (press release available here). The company reported earnings of $0.93 compared to expectations of $0.89 while revenue of $7.64 billion exceeded consensus by $80 million. For all of 2013, revenue was up 3% to $29.4 billion, and adjusted income from continuing operations was up 5% to $3.15. Even though shares are up 33% over the past twelve months, this quarter suggests more upside remains.
If we look at a geographic breakdown of the quarter, it is clear that Europe/Africa and the Middle East/Asia continue to be the primary drivers of growth. European revenue was up 15% year over year to $1.4 billion with strong results at both its drilling and production units. Stronger activity in the UK, Russia, and Central Africa continue to drive results higher. As the European economy continues its slow mend, demand for energy production should continue to grow, which should benefit African production and could lead some European countries to rethink their stance on fracking. I would look for Europe/Africa to be a bright spot at Halliburton again in 2014.
HAL also continues to do exceptionally well in the Middle East and Asia with revenue of $1.4 billion up 12.8% year over year. The Middle East was led by a 15% gain at Halliburton's drilling and evaluation unit. Increased drilling in China and its waters were a major reason for this record performance. With strong growth in Asia, their demand for oil and gas will continue to be extremely strong over the next 3-5 years, which is positive for Halliburton.
Moreover, these nations, particularly China, recognize that to be a geopolitical power it is critical to have a stable supply of energy or be energy independent. With China's demand, it will likely be a crude importer for as far as the eye can see. However, it is taking steps to de-risk its supply. It has signed deals with Russia for major oil and gas pipelines, which will require Russia to significantly increase its drilling sites. With a stronger presence in this nation, HAL will benefit from this action. China also continues to drill everywhere it can, including in the China Sea. Given Halliburton's offshore and onshore expertise, it should continue to grow sales in China. In other words, I expect 10%+ growth in the Middle East and Asia to continue in 2014 and 2015.
On the other hand, Latin America is a challenged region. Simply put, many oil wells have not been nearly as productive as hoped, and many currencies have been crushed. As a consequence, revenue in the region fell by 6% to $1.02 billion. This decline was driven entirely by a major slowdown in HAL's drilling and evaluation unit, which saw revenue fall 14%. I am looking for another weak year in 2014 as Brazil faces inflation and disappointing growth while other nations like Venezuela will continue to depreciate their currencies. At some point, Latin America should grow again, but that point will not be in 2014.
Last, North American revenue was a bit underwhelming at $3.82 billion. While this figure was up 2% year over year, it was down 1.5% sequentially. Now, the weather was unseasonably cold, particularly in the month of December, which had an adverse effect on drilling and production. We have seen reported weakness throughout the industry in December, and as a consequence, I expect this underperformance to be transitory. Halliburton's management is forecasting a modest increase in the North America rig count, which I think is an accurate assessment.
Horizontal drilling has opened the door to previously unfeasible reserves, and I expect drilling activity in regions like the Permian Basin and Marcellus Shale to continue to expand, especially as natural gas prices have rebounded significantly. Importantly, drilling activity in the Gulf of Mexico should also improve, which will buoy HAL's performance. Mexico is opening its waters to joint ventures as companies like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) have capabilities it lacks. This decision should lead to significantly higher drilling activity over the next 3-5 years, which will greatly benefit Halliburton. While North American results weren't great this quarter, I am more optimistic about 2014 and beyond.
Overall, this was a pretty strong quarter for HAL. Europe/Africa and Middle East/Asia delivered robust numbers while Latin America was weak and transitory factors hurt North America. I expect double digit revenue growth in Europe and Asia while Latin America should be a drag of about 5-8%. With a higher rig count and better margins, North America will also provide some solid growth in the 3-5% range.
After this quarter, I continue to look for HAL to earn $4.00-$4.25 in 2014, giving shares a forward multiple of 12x. With a structurally strong drilling industry thanks to new technology, I think this is a very attractive valuation and would be a buyer on this drop. Fair value is closer to 15x earnings or $60. With 20% upside, Halliburton is a great buy here.