SLB Schlumberger Ltd

Major oilfield services provider Halliburton Company (HAL) reported slightly better-than-anticipated fourth 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 $1.00, beating the Zacks Consensus Estimate of 99 cents and comfortably ahead of the year-ago adjusted profit of 68 cents.

Revenues of $7.1 billion were 36.9% greater than that achieved during the fourth quarter of 2010 and also surpassed the Zacks Consensus Estimate of $6.8 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 71% of its operating income.

For its fiscal year ended December 31, 2011, Halliburton reported income from continuing operations (excluding non-operating items) of $3.36 per share, above the Zacks Consensus Estimate of $3.34 and significantly outpacing the 2010 adjusted earnings of $2.06 per share. Revenues of $24.8 billion were 38.2% above the year ago period and also managed to beat the Zacks Consensus Estimate of $24.6 billion.

Segmental Performance

Completion & Production: Revenues for Halliburton’s Completion and Production segment were up 7.5% sequentially and 45.0% year over year to $4.3 billion, mainly reflecting strength in production enhancement, cementing and completion operations.

Segment operating income was $1.1 billion, a 1.8% sequential increase and up 58.0% from the year-earlier level.

Operating income in North America increased significantly – by $422 million – year over year, buoyed by higher domestic land and offshore activity. But sequentially, North American profitability was down 2.1% due to the effects of normal seasonality, price rises, logistical challenges, and recent purchases.

Internationally, operating income was up $39 million from the third quarter of 2011 on account of improved stimulation work in Mexico and Algeria, higher cementing activity in Mexico, Colombia and Angola, better vessel utilization in the North Sea, enhanced activity levels in Iraq, as well as increased demand for production enhancement services in Australia.

However, ex-U.S. profit was $23 million lower than that of the fourth quarter 2010. The reduction over the year-earlier quarter was due to unrest in North Africa and fierce price competition.

Drilling & Evaluation: Revenues from Halliburton’s Drilling and Evaluation business were 8.4% above third quarter levels and improved by a healthy 25.8% year over year to $2.7 billion, propelled by higher sales in all regions.

The segment’s operating income rose 30.1% from the September quarter and 35.6% from the year-ago period to $480 million.

Operating income in North America was $178 million during the quarter, an increase of $3 million from the previous quarter and up $64 million from the fourth quarter of 2010 on strong overall drilling activity.

International operating income increased $108 million sequentially and $62 million year over year. The rise over the periods reflects higher activity in Mexico and Iraq, enhanced demand for testing and subsea work in Brazil, increased demand for drilling services in the North Sea and Angola, and improvements from direct sales in Asia.

Balance Sheet

Halliburton’s capital expenditure in the fourth quarter was $789 million, bringing the full-year spending to $3.0 billion. As of December 31, 2011, the company had approximately $2.7 billion in cash and $4.8 billion in long-term debt, representing a debt-to-capitalization ratio of 26.7%.

Outlook

Halliburton management pointed out that fourth 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 Eastern Hemisphere hiccups – characterized by the political instability in North Africa, delays in Iraq and the cutthroat price competition – 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 that Eastern Hemisphere margins will come back to the mid- to high-teens range at the end of 2012, as Halliburton improves its foothold on new projects while increasing sales at a higher rate than rig count growth.

We expect these trends 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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