SLB Schlumberger Ltd

Major oilfield services provider Halliburton Co. (HAL) reported better-than-anticipated third 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 94 cents, beating the Zacks Consensus Estimate of 92 cents and comfortably ahead of the year-ago adjusted profit of 58 cents.

Revenues of $6.5 billion were 40.4% greater than that achieved during the third quarter of 2010 and also surpassed the Zacks Consensus Estimate of $6.4 billion, as sales increased across the company’s business units.

During the quarter, North America accounted for approximately 59% of Halliburton’s total revenues and 79% of its operating income.

Segmental Performance

Completion & Production Segment: Revenues for Halliburton’s Completion and Production segment were up 11.3% sequentially and 51.6% year over year to $4.0 billion, mainly reflecting strength in production enhancement  and cementing operations.

Segment operating income was $1.1 billion, a 16.3% sequential increase and up 75.4% from the year-earlier level.

Operating income in North America increased significantly – $133 million sequentially and a whopping $502 million year over year – buoyed by increased demand for production enhancement services in the domestic land market.

Internationally, operating income was up $17 million from the second quarter of 2011 on account of higher activity levels in Brazil, Indonesia and Malaysia, increased demand for production enhancement services in Angola and Algeria, as well as improved activity for the company’s Boots & Coots product service line in Norway and Algeria.

However, ex-U.S. profit was $43 million lower than that of the third quarter 2010. The reduction over the year-earlier quarter was due to lower completion tools sales in China and muted activity levels in Kuwait, Oman, and Qatar.

Drilling & Evaluation Segment: Revenues from Halliburton’s Drilling and Evaluation business were 8.9% above second quarter levels and improved by a healthy 25.5% year over year to $2.5 billion, propelled by higher sales in all regions.

The segment’s operating income rose 13.9% from the June quarter and 36.2% from the year-ago period to $369 million.

Operating income in North America was $175 million during the quarter, an increase of $5 million from the previous quarter and up $60 million from the third quarter of 2010 on strong drilling activity in the Gulf of Mexico and seasonal recovery in Canada.

International operating income increased $40 million sequentially and $38 million year over year. The rise over the periods reflect higher activity in Mexico, Brazil, Eurasia, Angola, Malaysia and Saudi Arabia, higher software sales in Colombia, and improvements from direct sales in China.

Balance Sheet

Halliburton’s capital expenditure in the third quarter was $741 million. As of September 30, 2011, the company had approximately $1.8 billion in cash and $3.8 billion in long-term debt, representing a debt-to-capitalization ratio of 23.6%.

Outlook

Halliburton management pointed out that third quarter profitability was driven by strong demand for its services in North America, together with gradual recovery in the international markets.

The world's second-largest oilfield services company after Schlumberger Ltd. (SLB) believes that despite the recent macroeconomic hiccups – characterized by dip in oil prices and associated declines in equity markets – the long-term prospects for the business remain robust.

Going forward, Halliburton anticipates benefiting from bullish near-term U.S. land drilling trends, where activity is being driven by horizontal drilling and liquids-rich plays. Additionally, the company expects its focus on the high-growth segments of deepwater and mature fields (both in North America and internationally) to result in a strong operating environment leading to continued delivery of positive earnings surprises.

Our Recommendation

Halliburton shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Longer-term, we are maintaining our Neutral recommendation on the stock.

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