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Summary

  • The Completion and Production segment is largely responsible for the growth realized by the company, with the segment’s revenues edging up by approximately 7.8% YoY.
  • In the U.S. region Halliburton has been facing challenges lately related to weather conditions, increasing competition, high logistics costs, and oversupply of hydraulic fracturing equipment.
  • The U.S. revenues are expected to remain flattish for FY2014 owing to limited activity in GoM and Brazil.

Halliburton Co. (NYSE:HAL) is one of the leading global organizations that provide products and services to the energy sector. The company just released its earnings for the first quarter of FY2014 which led to a 3.3% rise in the stock price of the company. The stock price has risen by 24% since the start of the year.

Revenue Distribution

The revenues of the company are distributed among two reportable segments, namely Completion and Production and Drilling and Evaluation, wherein 60% of the revenues are attributable to the former segment. Geographically, North America is the major region for the company since more than half the revenues are attributable to said region. The remaining half of the revenues is distributed amongst the Middle East, Asia, Europe, Africa, and Latin America. Contribution of each region is indicated in the pie chart below according to the numbers reported in the 2013 annual report.

Source: Annual Report, 2013

Earnings and Estimates

As per the earnings release for the first quarter of FY2014, the company has outperformed the analysts' estimates for its top and bottom lines. Total revenues of the company were $7.3 billion compared to Thomson Reuters' consensus of $7.24 billion. For the three months ended, the top line of the company grew approximately 5.40% compared to the same period last year.

Of the $7.3 billion reported revenues the net profit of the company was reported to be $622 million and per share earnings stood at $0.73beating analysts' estimates by 2 cents. Compared to the performance in the first quarter of fiscal year 2013 the company's EPS grew by approximately 9%. Last year, the bottom line was heavily impacted due to a litigation charge of $1 billion (pre-tax) in reference to the Deepwater Horizon incidence that occurred back in 2010 where Halliburton was one of the parties involved. Eleven people died as a consequence of the explosion in the GoM region in 2010 which caused the worst oil spill in history. This is the major reason for the reduced activity in the Gulf of Mexico.

Growth Or Lack Thereof

Analyzing the revenues by segment, it becomes apparent that the completion and production segment is largely responsible for the inherent growth realized by the company. The segment's revenue has increased by about 7.8% YoY. Although drilling and evaluation showed positive results as well, the revenue increase of 1.90% in this segment was not as significant. Again, the reduced performance of the segment is due to reduced drilling operations in Brazil and Mexico among other reasons. Geographically, the European, Middle Eastern, and African regions have shown the highest growth. Revenues from these regions increased 11% whereas the operating income across these locations grew 16%. Saudi Arabia, Thailand, Malaysia, and Indonesia also showed strong performance.

With regards to the U.S. region, the company has been facing challenges lately related to weather conditions, increasing competition, high logistics costs, and oversupply of hydraulic fracturing equipment. The rise in competition and oversupply has led to a downward pressure on prices, hurting the aggregate U.S. revenues. But since Halliburton is a long standing and large organization it has certain cost advantages compared to smaller competitors in the market. The company is taking immediate steps to haul in costs to bolster its margin performance. However, owing to limited activity in the Gulf of Mexico and Brazil, revenue from the region is expected to remain flattish for FY2014.

Financial Standing

Further scrutiny of the earnings report indicates that the company's long term debt remained constant compared to the same quarter last year, whereas the company's cash flow from operations position improved by 173% YoY. The company maintains a better current and quick ratio compared to its peers hovering around 2.73 and 2.04 respectively, whereas the industry average for said ratios is around 1.65 and 0.68 respectively. The company also maintains higher than industry average operating and net profit margins.

Concluding Remarks

In the second quarter of FY2014, Halliburton hopes its EPS increases at the rate of 25% owing to strong profit growth expected from the company's offshore operations and rebound expected in the North American operations. Halliburton's forecast meets with the general analyst consensus for the quarter. Furthermore, Halliburton distributes profits among shareholders through cash dividend payments and share repurchases. The company has repurchased shares worth $500 million in the first quarter of the year, reducing the share count by about nine million common shares. The company hopes to bring down the share count to 850 million by the end of the second quarter of 2014.

The cash payments have risen at a CAGR of 15.2% over the past three years. The fact that the company's top and bottom lines are anticipated to rise in the foreseeable future and the fact that it rewards its shareholders well means Halliburton looks like a sound investment to me.

Source: Halliburton - Positive Expectations Lay Ahead