The market continues to get good news from large cap oil service names. The second quarter began with a surprise to the upside by Baker Hughes (BHI). Schlumberger (SLB) also beat, as international sales were better than estimates. The story was essentially the same, as the Middle East, Europe, and Africa pushed up revenues. The results from both companies seemed to prepare investors for another good number by Halliburton (HAL). It didn't disappoint, as it beat on both the top and bottom line numbers.
In North America, Halliburton saw flat sequential revenues compared to a 17% decrease in rig count. The United States rig count was down 1%, but revenues increased 3%. Natural gas rigs decreased 18% from the first quarter of 2012. We have had a 42% drop in natural gas rigs since October of 2011. Halliburton's problems in North America stemmed from the cost of guar, pricing pressures in its production enhancement business, and efficiency disruptions of equipment locations. Guar was the biggest single problem noted by Halliburton, and in response to this purchased a large amount as it believes this problem will continue throughout the year. Due to this surplus, Halliburton was able secure more work as competitors didn't have enough guar on hand. Halliburton will have to work off this higher priced guar throughout 2012, which will hurt margins going forward. 67% of margin compression in Q2 was due to guar which increased in price by 75% from the first quarter. Q3 prices are expected to be 25% higher than Q2.
Like Baker Hughes and Schlumberger, Halliburton had positive things to say about the Gulf of Mexico. Not only is work picking up but margins have returned to pre-moratorium levels. It expects new deep water rigs moving in, will continue to strengthen margins and profits in the upcoming quarters. As with the rest of North America, Halliburton is adding market share in the Gulf.
International work significantly outpaced North America, in revenue and margin gains. Latin America had a strong quarter for revenues, but margins were impacted on the moving of equipment to Brazil. Brazil is believed to be an of importance in the upcoming year. Europe and Eurasia are now producing better, with margins better than the eastern hemisphere as a whole. China and Australia are beginning to show very good growth in the unconventional market. Operating income in this region was up 59%.
Halliburton's quarter is more interesting when broken down by division. Completion and production saw a revenue gain, while operating income fell. Completion and production in North America had pricing difficulties, but did see increased activity in the Gulf of Mexico and on liquids rich basins on land in the U.S. Completion and production internationally was quite good. Mexico, Argentina, and Venezuela all saw increased activity. It had a very good quarter in Europe and Africa with a revenue increase of 21% and operating income of 67%. The Middle East and Asia did well. Both Saudi Arabia and Australia saw increased sales across all product lines with respect to completion and production.
The drilling and evaluation division saw gains in Latin America. Its best areas were Mexico, Columbia, Ecuador, Venezuela, and Brazil. In the United States, this division saw pricing difficulties linked to the mobilizing of equipment from natural gas basins to liquids rich. The Gulf of Mexico helped to offset this. In Europe and Africa, Halliburton saw increases throughout the region in directional drilling. It had better fluids sales in Norway and wireline in Poland. In the Middle East and Asia, Halliburton saw improvements on several product lines in China and Saudi Arabia. India, Kuwait and Brunei also saw demand for these products and services.
Baker Hughes and Schlumberger also noted an increased need for service in international deep water plays. Malaysia saw increases across all product lines and was a strong area for Halliburton. East Africa has not only had an increased demand, but its deep water presence helped to sign land contracts Ethiopia and Uganda.
In summary, Halliburton reported a lot like Baker Hughes and Schlumberger. Guar pricing will continue to decrease margins throughout 2012. In response, it has found a replacement and will work to develop this in the coming months. Europe, Africa and the Middle East are all driving international growth in oil service. Deep water drilling is also seeing increased revenues and margins. Pricing constraints in hydraulic fracking will continue going forward, but Halliburton sees this bottoming. I would watch this sector closely as it may still have value. Going forward I would watch names like Weatherford (WFT) and Oceaneering International (OII).
Additional disclosure: This is not a buy recommendation.