HAL North American revenue up 24% sequentially
Halliburton (ticker: HAL) announced second quarter results today, showing earnings of $28 million, or $0.03 per share. After adjusting for special charges, an expected promissory note in Venezuela, for example, quarterly results were earnings of $201 million, or $0.23 per share.
As the world’s largest fracturing company, Halliburton has been able to take strong advantage of the continuing U.S. shale resurgence.
The company’s North American revenue grew by 24% sequentially, which outpaced rig growth of 21%. According to Halliburton Executive Chairman Dave Lesar, “Our margins grew into the double digits. More broadly, we outperformed our major peer in every geo-market, demonstrating that we continue to grow our global market share.”
North Sea, Russia drive revenue growth
Total revenue grew to $5 billion, a 16% sequential increase from Q1. International revenue grew, but not nearly at the pace of North American activity. Halliburton reported $2.2 billion in international revenue, up 7% from last quarter. The seasonal rebound in activity in the North Sea and Russia led Europe/Africa/CIS revenue to grow 12%. Increased drilling in Mexico, Venezuela and Colombia and stimulation work in Argentina grew Latin American revenue by 10%.
Middle East pricing remains low
Middle East/Asia revenue increased by 2% sequentially, due to increased fluid services in Asia and higher wireline and completion activity in the Middle East. However, Halliburton reports that pricing pressure across the region is preventing the realization of significant growth.
Halliburton acquired Summit ESP and Ingrain, Inc. in July, adding capabilities to several of its service lines. Summit ESP provides electric submersible pumps and related technology that will be used in Halliburton’s artificial lift line. Ingrain specializes in analyzing complex rock types and has developed digital scanning and analysis of rock physics. Halliburton will integrate this company into its wireline portfolio.
An insider’s assessment of the U.S. unconventional oil and gas industry: ‘these companies will stay alive, survive and thrive’
In his opening remarks at the outset of today’s conference call, which will be his final earnings call to host for the company, Halliburton Executive Chairman Dave Lesar commented extensively on the state of North American unconventional oil and gas activity—which has evolved over the past decade and a half as one of Halliburton’s bread and butter customer groups.
From Dave Lesar, executive chairman, Halliburton Company:
“I think it’s important to look at the North America unconventional ecosystem to understand our customers’ behavior and why their ability to so quickly increase production has expanded rapidly.
Currently, there’s a strongly held view by energy investors that the U.S. independent operators behave as a group. That view is wrong. When thousands of companies make discrete decisions about the same market each day, they do have a tendency to swing the activity and production pendulum too far one way or the other. That is not group think. It’s the impact of individuals trying to do the right thing for their investors.
Our U.S. customer base is not ten or so countries like OPEC. It is made up of thousands of companies from IOCs to individually-owned businesses.
The industry consists of ‘thousands of entrepreneurial, smart and motivated risk takers’
When you look at them separately, you see thousands of entrepreneurial, smart and motivated risk takers. They readily adapt to the quality of their reservoirs, have almost unlimited access to capital, aggressively apply new technology and quickly morph their business models and structures to meet changing market conditions, and, yes, sometimes even take advantage of U.S. restructuring laws. They are your classic American entrepreneurs, and their success should be recognized.
In Silicon Valley, such a success would be greatly celebrated as another industry disrupter. The unconventional disruption is not widely celebrated beyond the energy space, but it should be. The development of U.S. unconventional resources has been as disruptive to the global energy markets as Amazon has been to big box retailing or Uber to the taxi business.
It unleashed a wave of cheap, reliable energy that has disrupted global geopolitical and energy dynamics, made the U.S. more energy independent, caused OPEC to react and changed the fundamental economics of offshore production. And I believe it has created hundreds of billions of dollars of economic value, added hundreds of millions of dollars to government tax coffers and provided untold savings for consumers. So unconventionals is what I would call a disruptor, so let’s celebrate that.
Now I’ve heard energy investors say that today’s customer behavior shows nothing was learned in the last downturn.
That simply is not true. Our customers are smart and adaptive, and they do learn from the past. Their business DNA is to be survivors, and they are. Look at the reaction in the past several weeks. Today, rig-count growth is showing signs of plateauing, and customers are tapping the brakes. This demonstrates that individual companies are making rational decisions in the best interests of their shareholders.
This tapping of the brakes is happening all over the place in North America. I can tell you the market will respond. It will rebalance, and these companies will stay alive, survive and thrive. Because that is what they do.
I said several quarters ago that customer animal spirits were back, and they are, with a vengeance, and they are now running free through North America. Here’s my last piece of wisdom for you: Do not bet against the animal spirits that our North America customers embody. I never have, and I never will, because that is a bet that you will lose.
Now today is my last conference call and I’d like to take a moment to thank our analysts and investors.
It’s been a pleasure working with you, and although we haven’t always agreed, I’ve always enjoyed the spirited debates and intelligent conversations. I would also like to thank the employees at Halliburton for their hard work throughout my career. We have been through many cycles, emerging stronger from each one, and I am proud of what we have accomplished together.
And even though I will be absent from future calls, I look forward to the next 18 months, serving Halliburton as Executive Chairman. I am happy to leave these calls in the capable hands of Jeff, Chris and the other members of our experienced management team. I have no doubt they will continue to lead the company as a customer-centric and returns-focused business. And remember one thing: We are the execution company.
Q&A from HAL Q2 Conference Call
Q: I wanted to just circle back on the impact of reactivations in 2Q and how to think about any impact on the third quarter. It was talked about in terms of negatively impacting margins on your first quarter call. You still had incrementals in Completion and Production close to 50%. Could you maybe walk us through how you were able to offset some of the reactivation costs? And then to what extent will reactivation cost impact the third quarter? And do you intend to reactivate any more equipment or is it more refurbs or newbuilds at this point?
David J. Lesar: Bottom line is the costs were lower than expected in Q2. And that’s because we got there faster and cheaper than we thought. Our Duncan manufacturing team just simply way outperformed both by speed and bringing down the cost of everything. The other thing that happened was our people went back to work faster and that’s principally because of all of the demand that we saw for our equipment. I suppose one other thing is we were successful in bringing back a large quantity of former Halliburton employees, which is something we always wanted to do, but that also means that they go back to work more quickly with substantially less training.
But, as we look ahead to Q3, obviously, there’ll be new challenges to deal with. For example, our employees. Our employees haven’t had raises in three years and so we plan to, for example, provide our employees with raises. But what I would like you to do is listen to Chris’ guidance on completion and production. We said we’ll outperform the rig count growth on revenue and continue to improve margin. So that’s really how we see that.
Q: One of the scenarios that’s talked about if oil prices stay between $45 and $50 is that we continue to step up in terms of completion activity next couple of quarters, then maybe level off. Is getting to normalized margins a realistic scenario in your mind? And if so, do we hit those by the fourth quarter? Or would it be reasonable to anticipate being at normalized margins in next year if activity were to kind of level off at 4Q levels?
David J. Lesar: Well, look, we’re not backing off our expectation on normalized margins. As I’d said and I won’t give you a date, but I don’t have a crystal ball, but I expect it would be into 2018. But it starts with customer urgency as I’ve described and that really means having targets to meet targets, and that’s where we absolutely shine it on. That’s what our value proposition does. And we still see supply and demand tightness. I mean, our calendar is full as we look out. And so I don’t see any change in my outlook.
Q: On the completion of frac intensity, is it fair to say that you haven’t seen that yet peak? And if so, when you think about North American revenues going into 2018 in a flat rig market, should we still see revenues starting to flatten out as well? Or could you see still some growth in that revenue cadence with the completion intensity, your thoughts on 2018 in this flattening rig market?
HAL President and CEO Jeffrey Allen Miller: Well it’s too early to call on 2018. What I would say is the pace that we see we see a solid ramp in terms of our ability to execute and deliver on the things that we’ve talked about with respect to normalized margins. We do see currently DUCs building. There’s backend weighting to activity. And quite frankly, the science continues to drive the business. And so I think in terms of peak, the peak is going to be probably more science-based in the future and maybe less volume-driven.
