SLB Schlumberger Ltd

Major oilfield services provider Halliburton Company (HAL) reported better-than-anticipated second quarter 2012 results on the back of higher activity in the international markets, partially offset by weak North America results.

Earnings per share from continuing operations came in at 80 cents, beating the Zacks Consensus Estimate of 75 cents and flat year over year.

Revenues of $7.2 billion were 21.9% greater than that achieved during the second quarter of 2011 and also surpassed the Zacks Consensus Estimate of $6.9 billion, as sales increased across the company’s business units.

During the quarter, North America accounted for approximately 57% of Halliburton’s total revenues and 66% of its operating income.

Segmental Performance

Completion & Production: Revenues for Halliburton’s Completion and Production segment were up 4.0% sequentially and 23.3% year over year to $4.5 billion, mainly reflecting the buoyant demand for services in the domestic oil and liquids-rich land market, together with strong growth in the Eastern Hemisphere from. These more than made up for the annual Canadian spring break-up.

Segment operating income was $914 million, an 11.8% sequential decrease and was essentially flat from the year-earlier level.

In particular, operating income in North America decreased – by 16.4% year over year and 20.7% sequentially – hamstrung by a spike in the costs for guar gums (a key constituent of the company’s market leading hydraulic fracturing -- 'fracking' -- procedure) and tight pricing environment in production enhancement services.

The dismal showing in North America – responsible for three fourths of the segment profits – was somewhat offset by strong international performance. Operating income in the region was up 35.2% from the first quarter of 2012 and a whopping 145.1% from the year-ago quarter.

The positive comparisons were on account of improved cementing services demand in Russia; improved cost controls in Angola; better completion tools results in Norway, Qatar and Saudi Arabia; enhanced activity levels in Australia and Angola; as well as elevated demand for production enhancement services in Mexico, Qatar and Saudi Arabia.

Drilling & Evaluation: Revenues from Halliburton’s Drilling and Evaluation business were 7.6% above first quarter levels and improved by a healthy 19.7% year over year to $2.8 billion, propelled by increased drilling activity internationally, supported by a bullish demand for fluids in the Gulf of Mexico.

The segment’s operating income rose 6.8% from the March quarter and 21.3% from the year-ago period to $393 million.

Operating income in North America was $166 million during the quarter, a decrease of $24 million from the previous quarter and down $4 million from the second quarter of 2011 on the annual Canadian spring break-up and shift of work away from natural gas to oil and liquids-rich basins.

International operating income – at $227 million – increased $73 million year over year and $49 million sequentially. The rise over the periods reflects higher activity in Venezuela and Kazakhstan; enhanced demand for drilling services in Russia and Norway; improved pricing in Venezuela; better demand for wireline and testing and subsea services in Mexico; and improvements in wireline direst sales in Poland.

Balance Sheet

Halliburton’s capital expenditure in the second quarter was $869 million. As of June 30, 2012, the company had approximately $2.2 billion in cash and $4.8 billion in long-term debt, representing a debt-to-capitalization ratio of 24.9%.

Outlook

Halliburton management pointed out that second quarter profitability was driven by strong demand for its services 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 its leading position in the North American oilfield services market, improving upon its international margins, and expand market penetration in deepwater and underserved international regions.

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

Short-Term Rating

Halliburton shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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