Halliburton Is A Promising Investment Despite Its Flat Earnings

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 |  About: Halliburton Company (HAL)
by: Alpha Strategist

Summary

Halliburton reported better than expected quarterly results and is expected to continue to perform well in the future.

Increased drilling and exploration activity in deep-water will further strengthen the revenue base of the company.

The strong drilling activity in the Eastern hemisphere was the prime reason for the performance that beat the market expectation.

According to the Barclays bank report, companies are expected to spend about US$723 billion on exploration and production (E&P) in 2014. Halliburton stands to benefit from the trend.

Halliburton (NYSE:HAL) reported strong first quarter results. Halliburton reported a net income from continuing operations of $623 million after a loss of $13 million in the first quarter of last year. However, excluding the $637 million in charges related to the Macondo litigation recorded in the prior year, the company's earnings were flat. On the other hand, its revenue increased by 5.4% during the first quarter to record levels of $7.35 billion. The better than expected results were primarily driven by the strong drilling activity in the Eastern hemisphere. Similarly, higher offshore activity and operating efficiency also contributed to the company's profitability. It shall be desirable to discuss the company's recent results in detail and investigate whether the company is worth investing.

The company divides its operations into two business segments: the Completion and Production segment and Drilling and Evaluation segment. The Completion and Production segment contributes more than 51% of the revenues while the remaining 49% is contributed by the Drilling and Evaluation segment.

The Completion and Production segment offers cementing, stimulation, intervention, pressure control, and completion services. The segment consists of production enhancement services, completion tools and services. Similarly, the Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise well bore placement solutions that enable customers to model, measure, and optimize their well construction activities.

Much of the margin improvement is derived from the company's Completion and Production segment which includes the company's pressure pumping operations. The improvement in the margins of this segment is primarily driven by the company's initiatives like"Frac of the Future".

The "Frac of the Future" program allows the company to save millions of gallons of diesel each year by using natural gas to fuel drilling equipment. Natural gas is not only cheaper but its emissions are 90 percent lower than those of diesel.

The company has been fitting its fracking fleet with new equipment such as efficient pumps that can operate on natural gas. Up until now, the company has only converted around 10 percent of its fleet to this program and expects to convert around 20 percent by the end of this year. Going forward, the company is determined to achieve a goal of around 50 percent by the end of 2015. Halliburton is leading the way by innovating the fracking process to ensure efficient operations, which will then be translated into higher margins.

North America Will be the Driving Force

The future outlook of the company largely depends upon the increasing E&P spending. In anticipation of higher natural gas prices, E&P companies are increasing their spending. According to research conducted by Barclays Bank, oil and gas companies are expected to spend about US$723 billion on exploration and production (E&P) in 2014which reflects an increase of 6.1% from 2013.The growth is primarily driven by North America as the region is expected to experience an increase of more than 7% in E&P spending in 2014, compared with a 2% increase in 2013 based on a survey of more than 300 oil and gas companies.

The Gulf of Mexico is also witnessing an increase in drilling activity. It has seen the average rig count increase 23.5% last year to 58. The higher drilling activities create a bigger market for the company to operate. Going forward, the company is expecting to start drilling and evaluation services for an additional 14 to 16 deep water rigs. In addition, it is also optimistic about the higher levels of completion sales during 2014. Another key trend to look for in the North American region will be the increasing shift towards horizontal drilling in the Permian basin, which operates almost a third of oil directed rigs in the US, Halliburton stands out as one of the companies that will benefit the most from increasing E&P spending. The company is deriving nearly 50 percent of its revenues from the North American region.

Deep-water Growth

Deep-water contracts are lucrative to oilfield service companies as they have long contract lives and have high service intensity. The margins in the industry are also relatively healthy. The company's new technology deployments could help the company to capture more market share. Going forward, Halliburton expects to outgrow its market by around 25 percent. The growth will primarily be driven by West Africa and the Gulf of Mexico.

Concluding Remarks

With the recently enacted initiatives, Halliburton stands to benefit in two aspects. Firstly, the company will be able to ensure higher margins, supported by lower operating costs. Secondly, by switching to natural gas and clean sources of energy, the company is all set to go green. The coal to gas conversion will be much appreciated by long-term investors especially in a scenario when the U.S government is no longer supportive of coal-powered projects. Similarly, the company is well positioned to capitalize on the growth of deep-water drilling and exploration.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.