Black Is the New Gold: Halliburton Strikes Oil
Halliburton (NYSE:HAL) is an oil service stock that I have traded many times over the years. I have long preferred its rival Schlumberger (NYSE:SLB), although both are very similar in many respects. Schlumberger just reported its earnings and in an article published July 18, I tipped investors that Halliburton could do well as Schlumberger crushed estimates, proving to us that in this market, black is the new gold.
While very similar to Schlumberger, Halliburton has unique differences. It provides a range of services and products for the exploration, development, and production of oil and natural gas to oil and gas companies all over the globe. The company operates in two segments: Completion and Production, and Drilling and Evaluation.
The Completion and Production segment offers production enhancement services, including stimulation services, sand control services and cementing services comprising bonding well casings, and casing equipment. It also offers completion tools that provide downhole solutions and services, including well completion products and services, intelligent well completions, liner hanger systems, sand control systems, and service tools. This segment also provides well intervention services, pressure control, equipment rental tools and services, and pipeline and process services; and oilfield production and completion chemicals and services that address production, processing, and transportation operations.
The Drilling and Evaluation segment offers drill bits and services, including roller cone rock bits, fixed cutter bits, hole enlargement, and related downhole tools and services, as well as coring equipment and services; wireline and perforating services, such as open-hole logging, cased-hole and slickline, borehole seismic, and formation and reservoir solutions; and testing and subsea services comprising acquisition and analysis of reservoir information and optimization solutions. This segment also provides drilling fluid systems, performance additives, completion fluids, solids control, specialized testing equipment, and waste management services.
Now that you have a solid understanding of where Halliburton’s profits are generated, let’s talk about the company’s recent performance. With oil prices so high of late, it has helped the company, as has a higher than average natural gas price. The company saw income from continuing operations in its second quarter of $776 million, or $0.91 per diluted share. This compares to income from continuing operations for the first-quarter of 2014 of $623 million, or $0.73 per diluted share. In other words, a 25 percent year-over-year improvement.
How did Halliburton get here? Well, much like Schlumberger, revenue for was up significantly. Halliburton’s total revenue in the second-quarter was a record $8.1 billion, compared to $7.3 billion in the first-quarter of 2014. Operating income was $1.2 billion, 23 percent higher than operating income of $970 million in the first-quarter of 2014 resulting from significant activity improvements in North America and the Eastern Hemisphere as well as higher prices.
In North America, second-quarter revenue increased 11 percent and operating income was up 31 percent compared to the first-quarter of 2014, outpacing a 4 percent increase in the United States land rig count. Service intensity levels continued to expand, as completion volumes per well were up more than 35 percent compared to the second-quarter of last year. Eastern Hemisphere revenue grew by 9 percent and operating income by 26 percent. In the Middle East/Asia region, revenue increased 11 percent and operating income increased 25 percent sequentially. In Europe/Africa/CIS, sequential revenue and operating income increased 6 percent and 27 percent, respectively. The growth resulted from seasonal recovery in the North Sea and in Russia, as well as activity gains in sub-Saharan Africa. In Latin America, revenue increased 4 percent sequentially, while operating income declined 39 percent (the only smudge on this splendid quarter.) Dave Lesar, chair, president, and chief executive officer, said:
“I am very pleased with Halliburton’s second-quarter results and continue to be very excited about the momentum of our business for the rest of the year and beyond. Once again, we delivered industry-leading revenue growth both sequentially and year over year compared to our primary peers [Schlumberger]. We expect North America activity levels to continue to improve, with margins approaching 20 percent in the third-quarter. We have concluded based on the strength of this outlook that we will immediately accelerate additions to our hydraulic fracturing fleet and logistics capabilities, with new crews available for service beginning later this year. In the Eastern Hemisphere, we are successfully executing our growth strategy.
“We continue to forecast full-year Eastern Hemisphere revenue growth in the low double digits, with average full-year margins in the upper teens. Saudi Arabia continued to lead the growth, and we expect this region to have the highest growth rate for the full-year 2014, despite the potential for activity disruptions or project delays in Iraq later this year. Our strategy is working well and we intend to stay the course. We see strong, sustainable growth opportunities across the mature field, deepwater and unconventional markets. We continue to be excited about the North America market, and although there may be near-term choppiness in certain international markets, we see a strong pipeline of opportunities.”
Looking ahead, Halliburton is doing very well. The board recently approved an additional $4.8 billion in stock repurchase authorization, to a new total repurchase capacity of $6 billion. This reflects the company’s confidence in the strength of its long-term business outlook. The overall global economic outlook continues to be mixed. The fundamentals for a slow recovery are still intact. The gap between oil supply and demand is narrowing because of stronger demand and oil supply which is tightening spare capacity is giving a floor support for oil prices. The same is not true for natural gas, which could pressure prices. Overall, Halliburton is moving in the right direction. So long as oil prices remain high and global conflict remains at bay, the stock will rise.
Disclosure: Christopher F. Davis is long Schlumberger but holds no position in Halliburton. He has a buy rating on Halliburton and a $77 price target.