SLB Schlumberger Ltd

Major oilfield services provider Halliburton Company (HAL) reported better-than-anticipated first quarter 2012 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 a charge associated with BP plc’s (BP) Gulf of Mexico disaster in 2010, came in at 89 cents, beating the Zacks Consensus Estimate of 86 cents and comfortably ahead of the year-ago adjusted profit of 61 cents.

Revenues of $6.9 billion were 30.0% greater than that achieved during the first quarter of 2011 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 61% of Halliburton’s total revenues and 76% of its operating income.

Segmental Performance

Completion & Production: Revenues for Halliburton’s Completion and Production segment were essentially flat sequentially but was up 35.3% year over year to $4.3 billion, mainly reflecting the buoyant demand for pressure pumping services in the domestic land market, together with contribution from the recent purchase of Multi-Chem Group LLC, a leading supplier of oilfield production and completion chemicals.

Segment operating income was $1.0 billion, a 4.7% sequential decrease though it improved considerably (by 57.0%) from the year-earlier level.

Operating income in North America increased significantly – by 41.9% – year over year, propelled by higher production enhancement and cementing activities. But sequentially, North American profitability was down 7.3% due to the effects of tepid natural gas-directed activity in the region stemming from plummeting commodity prices.  

Internationally, operating income was up 12.2% from the fourth quarter of 2011 and a whopping 258.7% from the year ago quarter. The positive comparisons were on account of resumption of operations in North Africa, improved demand in Nigeria, higher cementing profitability in Oman, enhanced activity levels in Mexico, Indonesia and Iraq, as well as elevated demand for cementing services/completion tool sales in Brazil.

Drilling & Evaluation: Revenues from Halliburton’s Drilling and Evaluation business were 5.8% below fourth quarter levels but improved by a healthy 22.2% year over year to $2.6 billion, propelled by increased drilling activity, supported by a bullish market for wireline and perforating services.

The segment’s operating income fell 23.3% from the December quarter though it improved 60.0% from the year-ago period to $368 million.

Operating income in North America was $190 million during the quarter, an increase of $12 million from the previous quarter and up $72 million from the first quarter of 2011 on strong demand for fluids as well as wireline and perforating services.

International operating income increased $66 million year over year. The rise over the period reflects higher activity in Brazil and North Africa, enhanced demand for fluids in Saudi Arabia, better demand for drilling services in the United Kingdom, and improvements wireline services activity in the Middle East.

However, ex-U.S. profit was $124 million lower than that of the fourth quarter 2011. The reduction over the earlier quarter was due to cost escalations in Mexico and Norway, with the later being also affected by severe weather-related seasonality.

Balance Sheet

Halliburton’s capital expenditure in the first quarter was $782 million. As of March 31, 2012, the company had approximately $2.7 billion in cash and $4.8 billion in long-term debt, representing a debt-to-capitalization ratio of 25.8%.

Outlook

Halliburton management pointed out that first 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 certain issues in North America – characterized by depressed natural gas fundamentals and cost inflation – 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. Though the company expects that Eastern Hemisphere pricing environment will remain competitive, Halliburton looks to work its way through the issue by improving its cost structure while introducing new technologies.

We expect these trends to result in a strong operating environment leading to continued delivery of positive earnings surprises.

Rating & Recommendation

Halliburton shares currently retain a Zacks #4 Rank, which translates into a short-term Sell rating. Longer-term, we are maintaining our Neutral recommendation on the stock.

 
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