SLB Schlumberger Ltd

Major oilfield services provider Halliburton Co. (HAL) reported better-than-anticipated second-quarter 2011 results, which were helped by the strength and sustainability of the all-important North American onshore activity levels (to which the company is heavily leveraged through its market-share-leading pressure-pumping business).

Earnings per share, excluding special items, came in at 81 cents, beating the Zacks Consensus Estimate of 72 cents and comfortably ahead of the year-ago profit of 52 cents.

Revenues of $5.9 billion were 35.3% greater than that achieved during the second quarter of 2010 and also surpassed the Zacks Consensus Estimate of $5.6 billion, as sales increased across the company’s business units.

During the quarter, North America accounted for approximately 58% of Halliburton’s total revenues and 80% of its operating income.

Segmental Performance

Completion & Production Segment: Revenues for Halliburton’s Completion and Production segment were up 14.1% sequentially and 51.2% year over year to $3.6 billion, mainly reflecting sustained strength in U.S. production enhancement operations.

Segment operating income was $918 million, a 39.1% sequential increase and up 84.7% from the year-earlier level.

Operating income in North America increased significantly – $213 million sequentially and a whopping $517 million year over year – buoyed by increased demand and pricing gains.

Internationally, operating income was up $45 million from the first quarter of 2011 on account of seasonal recovery in the North Sea and higher activity across all product service lines in Saudi Arabia/Australia.

However, ex-U.S. profit was $96 million lower than that of the second quarter 2010. The reduction over the year-earlier quarter was due to lower completion tools sales in Malaysia, the shutdown in Libya, and project delays in Iraq.

Drilling & Evaluation Segment: Revenues from Halliburton’s Drilling and Evaluation business were 9.8% above first quarter levels and improved by a healthy 16.2% year over year to $2.3 billion, propelled by higher sales in all regions.

The segment’s operating income rose 40.9% from the March quarter and a marginal 1.9% from the year-ago period to $324 million.

Operating income in North America was $170 million during the quarter, an increase of $52 million from the previous quarter and up $39 million from the second quarter of 2010 on strong U.S. drilling activity (both onshore and in the Gulf of Mexico).

International operating income increased $42 million sequentially but was down $33 million year over year. The rise over first quarter levels reflects higher activity in Brazil, as well as strong seasonal demand for drilling services in the North Sea and Russia. On the other hand, contract delays in Iraq pulled down Halliburton’s profitability from the corresponding period last year.  

Balance Sheet

Halliburton’s capital expenditure in the second quarter was $719 million. As of June 30, 2011, the company had approximately $1.4 billion in cash and $3.8 billion in long-term debt, representing a debt-to-capitalization ratio of 24.7%.

Outlook

Halliburton management pointed out that second quarter profitability was driven by strong demand for its services in North America, which more than offset the shutdown in Libya, project delays in Iraq, mobilization costs in Sub-Saharan Africa, and tepid market conditions in the U.K. and Algeria.

The world's second-largest oilfield services company after Schlumberger Ltd. (SLB) believes that bullish near-term U.S. land drilling trends, where activity is being driven by horizontal drilling and liquids-rich plays, were able to make up for the disruptions in North Africa and sluggish international pricing.

Going forward, Halliburton anticipates benefiting from demand improvements in select North American basins, as operators continue to make the exploitation of unconventional resources the focus of their investment.

Our Recommendation

Halliburton shares currently retain a Zacks #2 Rank, which translates into a short-term Buy rating. Longer-term, we are maintaining our Neutral recommendation on the stock.

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