Company Overview: Halliburton Company provides services and products to the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production throughout the life of the field. It operates through two segments: the Completion and Production segment, and the Drilling and Evaluation segment. The Completion and Production segment delivers cementing, stimulation, intervention, pressure control, specialty chemicals, artificial lift and completion services. The Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation and wellbore placement solutions that enable customers to model, measure, drill and optimize their well construction activities. It serves national and independent oil and natural gas companies. As of December 31, 2016, it had conducted business in approximately 70 countries around the world.


HAL Details

Decent First quarter 2018 performance meeting market expectations: Halliburton Company (NYSE: HAL), has reported the adjusted earnings per share of $0.41 in the first quarter of FY 18, which is in line with the market’s estimates for the adjusted earnings per share. The company had reported the adjusted revenue growth of 34 percent to $5.74 billion in the first quarter of FY 18 over Q1 FY17, also in line with the consensus estimate for revenue of $5.74 billion. The revenue grew as North American company’s boosted oil and gas production due to rising oil prices. Further, the growth in revenue came despite a $312 million write down on Halliburton's remaining assets in Venezuela, and a hit to earnings related to the impact of cold weather earlier in the quarter. The adjusted income from continuing operations stood at $358 million, compared to $34 million in the year-ago period. Meanwhile, HAL’s revenues from the North American segment grew by 58% year-over-year to $3.52 billion, due to the U.S. land market. The company’s demand for pressure pumping services was strong, with its frac fleets achieving a new record for stage counts, while other activities such as drilling and an artificial lift also experienced a strong uptake. HAL has also posted modest growth of approximately 9 percent in international markets, driven by the Europe/Africa/CIS division and the Middle East/Asia unit. There is a significant improvement over the much softer expectations highlighted this time of last year, which included a sideways-moving foreign market along with observed pricing pressures. However, the company continued to underperform in Latin America, due to activity declines in Venezuela and weaker pressure pumping and project management activity in Mexico.


First Quarter 2018 Financial Performance (Source: Company Reports)

Strong Performance of Operating Segment in 1Q 2018: In the first quarter of 2018, HAL’s Completion and Production revenue grew 46% to $3.8 billion, from the first quarter of 2017, while the segment’s operating income tripled to $500 million. The segment’s growth was driven by increased activity in the United States land sector. Further, the segment’s results improved due to increased well completion services in Europe/Africa/CIS and higher stimulation activity in the Middle East. Moreover, in the first quarter of 2018, HAL’s Drilling and Evaluation revenue grew 15% to $1.9 billion, from the first quarter of 2017, while operating income grew 54% to $188 million year over year. This growth was primarily due to increased drilling activity in North America and the Eastern Hemisphere, specifically in the North Sea. However, the results were partially offset by activity declines across multiple product service lines in Latin America.


Segment and Geographic Result (Source: Company Reports)

Challenges in Pressure Pumping Market: Pressure pumping is one of Halliburton’s most important product lines and there has been some concern among investors that the U.S. pressure pumping market could see some oversupply, with about 3.3 million additional hydraulic horsepower of capacity coming online this year. Halliburton’s key rival Schlumberger had also indicated that its capacity additions were less than planned, due to lower utilization, inefficiencies, and softer pricing. However, Halliburton still expects the market to remain tight for the rest of 2018, and its efforts would enable it to manage the scenario. For instance, the company’s wear and tear and degradation of existing equipment will reduce the effective net addition of capacity. The company projects that approximately 50% of the announced horsepower would be replacing existing equipment on the field. Moreover, customers now have a large portfolio of economically viable projects, with oil prices ruling at close to $70 a barrel, which implies that service intensity could also increase further. However, in this environment, HAL has a clear advantage with the proprietary equipment and preventive maintenance technology that reduces the company’s relative maintenance expense. The expansion in the operating margins over the last year reflects the superior ability to manage through the increased maintenance. HAL has generated industry-leading returns while expensing the maintenance costs, in contrast to many of HAL’s competitors who capitalize their costs.

Technology highlights: The group’s EARTHSTAR, is a deep resistivity service which offers customers greater reservoir insight to create better wells by using a better mapping and real-time geo-steering decisions. Their ICRUISE intelligent rotary steerable system is reducing drilling time while enhancing well placement accuracy to optimize asset value for their customers. They also upgraded fleet of drilling motors which have been proving effective in U.S. land. These motors are more powerful and have improved reliability maximizing drilling efficiency for their clients. The group is focusing on their R&D spend for their drilling technology and made solid progress in a short period of time. The market for these technologies and a further equipment in their development pipeline is growing. They intend to spend a big part of this year’s capital budget on these tools. The group is forecasting to generate attractive returns in the years ahead.

US rail system is experiencing high-demand: The US rail system is experiencing high-demand due to strong economic activity. This increased overall demand is adding pressure to the rail system, while at the same time, the industry is attempting to move more and more sand every quarter. However, this stress is impacting the timing of deliveries. HAL’s sophisticated sand supply desk and logistics system is working to reduce this problem. The company believes the ultimate solution is the increased use of local sand. Therefore, HAL intends to utilize those resources to provide services for the customers as increased supply comes online in the latter half of the year.

Dealing with the bottleneck trucking: HAL is searching qualified drivers and dealing with congested infrastructure. Containerized sand is considered an effective tool to reduce demerge and truck demand for well side. Therefore, HAL continue to roll out the containerized sand solution currently deployed across a third of the fleet to reduce costs, increase efficiency and improve the service quality.


Cash Flows (Source: Company Reports)

Guidance: The group expects their CapEx spend to be about $2 billion by FY18. For 2018, they expect spending slightly to be more while customer demand would support this investment and the group forecasts to generate attractive returns. The group sees to generate strong free cash flow in 2018 and forecasts cash balance to grow in the second half of the year. As per their Drilling and Evaluation division, they forecast their revenue and margin to be similar to the first quarter, primarily on the back of the ongoing pricing pressure in the international market offsetting activity increases. As per their Completion and Production division, the group forecasts a solid revenue and margin growth boosted by the strengthening North America market.

Stock Recommendation: With a surge of 10.1% in last one year in terms of stock prices, HAL declared the 2018 first quarter dividend of eighteen cents ($0.18) per share on the company’s common stock payable March 28, 2018, to shareholders of record at the close of business on March 07, 2018. HAL’s return on equity has been 3.7% in 2017 against -46.3% of 2016. They forecast to achieve normalized margins of over 20% in North America by the end of 2018, driven by tighter conditions in the pressure pumping market. HAL is confident about its relative performance for the rest of the year 2018, and the company’s ability to grow the North America margins and to maximize the value of the global footprint. The run rate for 2018 international tendering activity is on a pace to double from 2017 which leads us to believe that there will be improved activity in 2019 to help soak up resources and create an opportunity in terms of pricing. Over the last year, the Halliburton’s stock has rebounded with favorable movement in oil space and with group’s efforts on expense management. The group is expected to continue to witness gains from the oil market and the efforts at the organizational and business level to mitigate competition. We rate a “Buy” on the stock at the current price of $ 51.75.
 

HAL Daily Chart (Source: Thomson Reuters)

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