Oilfield service giant Halliburton Company (NYSE: HAL) reported Q2 income from continuing operations of $511 million, or $0.58 per diluted share.
This compares to reported income from continuing operations for the first quarter of 2018 of $46 million, or $0.05 per diluted share, and adjusted income from continuing operations for the first quarter of 2018 of $358 million, or $0.41 per diluted share, excluding impairments and other charges related to a write-down of all of the company’s remaining investment in Venezuela.
2Q operating income doubles Q1
Operating income was $789 million during the second quarter of 2018, which is a 27% increase, compared to the reported operating income of $354 million and adjusted operating income of $619 million in the first quarter of 2018.
U.S. land: largest and fastest growing energy market in the world
“Our Completion & Production division grew operating income by 34%, primarily driven by the strength of U.S. land. Despite pricing levels that have yet to fully rebound from the recent down cycle, we are achieving outstanding margins. This is the largest and fastest growing energy market in the world. On a year-to-date basis, we have grown revenues 47% year over year, while the U.S. land rig count has increased 16%. U.S. land achieved margins that are closing in on what we achieved during the previous peak in 2014,” Halliburton CEO Jeffery Miller said in a statement.
Q&A
Selected Q&A from Halliburton’s Q2 call is below.
Q: On the international side, you talked a little bit of pricing starting to at least tighten as we go into 2019. Are you already having these discussions with the customer base at this point? And do see your utilization of equipment basically getting to that trigger point where you have to raise pricing in order to justify CapEx investments before year-end?
Halliburton CEO Jeffery Miller: We’re clearly having those discussions with clients. We are seeing the ramp-up in activity internationally and seeing some tightness in certain product lines. For example, we bumped up CapEx last quarter at Sperry in anticipation of rolling out technology, and what we see as that runway. But, we’re coming off of a tough bottom here, so discussions don’t necessarily mean price increases, certainly not immediately.
Q: What are going to be the main moving pieces that will impact profitability in North America over the next couple of quarters in your mind?
Halliburton CEO Jeffery Miller: I do know with certainty that 2019 is going to be humming. I mean we’re looking at demand that’s already on the books, and I know this business. And so whenever equipment moves around or we see any kind of slack in the system at all, I know that maintenance cost goes up. And I’ve told our people to take advantage of that and spend more, but be ready for 2019, which realistically translates into about a $0.04 incremental impact on Q3, and that additional $0.04 is already baked into the guidance that I gave you. So I don’t know if that gives you a little more color. I mean this is a great market and great business.
Q: So, Jeff, just to dig into it a little bit further on the comments on the Permian and the customer behavior, some are moving forward and very active, and then some you’re saying are reducing activity or adding fewer than expected rigs. And then maybe you could give a little bit more color on the mix as far as the number of customers, are you starting to see some slowing of activity? And then also your comments on the pricing pressure in some areas, just a little bit more color there would be great.
Halliburton CEO Jeffery Miller: The Permian off-take has nominal impact today, but as I described it, not naïve to the math. I mean, clearly, this is a world-class resource, and the entrepreneurs in that market will get it solved, meaning never bet against them. But in the near term, I think perception has as much impact as anything. And by that, I mean, it weighs on customer urgency, which ultimately has an impact on our utilization and efficiency. But look, no doubt this is a world-class resource, as far as more color, not much more to give other than a couple of very small, but leading, and I would say nominal factors at this point with respect to off-take.
Q: So you talked about having seen some of these efficiency drags in the past, not the first time that you’ve seen some of these issues creep up. But I was just hoping you could talk about kind of how this cycle compares to last cycle, particularly with E&P trends.
We’ve been hearing a lot about these four-well pads being the preferred size, some of them are being drilled simultaneously here in bigger pads. So I’m just curious that as these operations start to scale up, I would think this really increases your visibility into customer activity quite a bit more, particularly with DUC inventories. Can you talk about how that potentially can help you during issues like this? And whether or not that can actually ultimately lift your margins going forward, this increased visibility you have? Because I don’t think you’ve ever had visibility like this in the past on your customers.
Halliburton CEO Jeffery Miller: These are bigger capital expenditures than what you typically see in unconventionals, but it also increases utilization and better utilization throughout the day, it also allows us to better organize work. And because of the size of these, yes, there’s more visibility of them sort of as they manifest out in front of us. I also think, though, it’s a demonstration of just the market moving towards better returns in general. So it’s as our customers look for ways to produce more and more quickly and try to get returns sooner in the cycle, on the types of capital investments required for these larger pads.
Q: On your international commentary you had talked about competitors aggressively taking up some of these lower-priced tenders out there. You talked somewhat positively about pricing going forward. I got the sense from your commentary that capacity has tightened up now to the point internationally that you feel better about the pricings on contracts going forward or is there something with the mix of the contracts that are coming out that suggest that pricing or margins at the very least could be better?
Halliburton CEO Jeffery Miller: We are seeing some tightening in certain markets. International is a really big place, and you can’t really paint it with one brush. As I described in the North Sea, seeing some tightness there, we’ll see some tightness in markets as we move around. And as a baseline of work is tendered, the follow-on work after that quite frankly is where there’s more opportunity from a pricing standpoint, or a bidding, tendering standpoint, to do things around price. And I expect that will unfold as we work into 2019. But the base level of business is always very competitive, and that’s where a lot of the efficiencies and work is done to improve those.
So my comment around tightness is, I think I’m seeing some tightness in certain service lines, I described drilling tools, which I think will drive some tightness, but moreover it will come in sort of geographies. Now fortunately, we’re seeing this across a number of geographies in terms of an uptick, but as far as that tightness goes, that will be sort of one at a time, I expect.
