Current HAL Stock Info

Halliburton: things are getting better for us and our customers

In Halliburton’s (ticker: HAL) Q3 2016 conference call today, CEO Dave Lesar characterized the business climate in Q3 for the company and gave some hints about where the industry feels like it is heading in Q4 2016 and into 2017. The following excerpts are from Lesar’s and other HAL executives’ remarks during the call.

Halliburton execs comment on Q3:

  • Our North America revenue grew 9% for the period [Q3], representing the first revenue increase in seven quarters.
  • Our customers’ “animal spirits” remain alive and well in North America, even though for some, they may feel caged in a bit by cash flow constraints in the short-term.
  • The average U.S. rig count increased 14% over the quarter driven primarily by rig additions to smaller operators where we saw a trend of less service-intensive wells which is not activity typically worth chasing at today’s pricing.
  • This quarter was also impacted by the natural lag time between drilling and completion activity.
  • On a monthly basis, we have already achieved the run rate of $1 billion of cost savings annually.
  • We also generated over $1 billion in cash flow from operating activities this quarter.
  • As you all know, as we executed our play book, we gained significant market share globally through the downturn. As the markets stabilize, our primary focus will now switch to improving our margins while maintaining that market share.
  • In the U.S. we believe we now have the highest market share we’ve ever had. And at this point, if we have to give some of it back to move margins up, we might take that approach.
  • In North America we achieved a 41% incremental margin.
  • We remain steadfast in our belief that significant activity increases from our customers starts with sustainable commodity prices over $50 per barrel which we haven’t seen in any meaningful way yet since the rig count activity bottomed out.
  • In pressure pumping, we estimate that the U.S. active fleet, I emphasize active, grew to over seven million-horsepower and the utilization of that active marketed fleet is about 70%. This is a long way from full capacity but it represents substantial tightening during the third quarter.

HAL looks at Q4:

  • Operators have had time to reflect on their future drilling plans, and I believe they will approach the recovery with a rational, methodical response in activity based on commodity price fluctuations.
  • We are now seeing completion activity starting to pick up as we start the fourth quarter.
  • Looking ahead to the fourth quarter on North America land, based on current customer feedback, we remain cautious around customer activity due to holiday and seasonal weather-related down times. Our customers may take extended breaks starting as early as Thanksgiving and push additional work to the first quarter of 2017.
  • As one customer told me, “Dave, it doesn’t make any sense for me to rent an efficient high spec rig if I have to start and stop all the time for the holidays or the last five weeks of the year. I just can’t get the efficiencies I’m paying for in the rig. I’d rather just wait until next year to start drilling.” And I believe we’ll see a lot of that mentality in the fourth quarter.
  • Things are getting better for us and our customers.

HAL looks at 2017:

  • We expect to see a bottoming of the international rig count in the first half of 2017.
  • Unconventionals, particularly those in North America, are leading the recovery in activity.
  • North America has assumed the role of swing producer in global oil production. Because of the shift away from production discipline, which was historically created by OPEC, our industry will likely experience shorter commodity price cycles going forward.
  • We see the future market as a combination of shorter cycles in range-bound commodity prices. In that environment it is imperative that returns-focused companies like Halliburton be more asset light.
  • Our customers remain focused on costs and producing more barrels. I believe this puts us in an excellent position [to] collaborat[e] with customers to engineer solutions that deliver the lowest costs per BOE. In fact, the more I talk to customers, the more I am convinced this is the winning formula.
  • While we know the industry has additional horsepower on the sidelines that can come into the market, we also know that this additional equipment requires substantial maintenance to be put back to work and will require adequate price increases to justify its return.
  • So as we look ahead, we expect pricing to work its way through a couple of predictable steps. The first step, which we’re starting to see now, is a tightening of active capacity. This will have a modest price impact but more importantly, it allows increased utilization to have a positive contribution to earnings. Step two is when we see equipment requiring significant investment returning to the market. I expect that this will require significantly higher pricing to justify the investment. This is by no means traditional pricing power. Instead it’s the industry recognizing the relationship between investments and returns. Let’s hope.
  • Last quarter we worked with a Permian operator who wanted to step outside of their core assets and find a way to optimize the value of their acreage. With a robust drilling and completion plan in place, the customer sought to minimize completion damage during flow back to maximize overall recovery. Through the use of our Caliber engineered flowback service, we were able to prevent damage and achieve a 15% higher cumulative production on this well than on wells nearby with similar completions. The well is now the best producer in the customer’s portfolio despite it being in the geology that had been originally considered marginal. There’s been a lot of talk about drilling in core reservoir rock recently. I believe it’s now our job to help our customers extend the definition of core.


During the Q&A in the call, analysts asked some specific ‘activity in the pipeline’ and basin/equipment related questions which Halliburton’s top executives addressed in detail.

Q:  It sounds like you’ve got customers who are starting to line up work for 17 at this point and I was wondering if you could perhaps give any color to that effect.

HAL:  Well, we talked about Q4; at this point the board is full. But we’re not clear whether that’s customer optionality or not. History would say we slowdown in the holidays. That would push more work into the first part of next year. But, again, that part of the market is not as clear at this point in time. So we are going to manage cost and manage businesses, we look at that to keep the structural costs and savings in place and be absolutely positioned for when the recovery happens.

HAL:  I think our general view is that Q1 is going better. Right, customers are engaging. But the amount – how much better it’s going to be is still going be highly dependent on what the commodity price is, going into the first part of next year. But we think we’re clearly on a path for recovery.

Q:  I was down in the Permian about a month ago, met with a collection of operators and everyone was just discussing more sand per well and longer laterals, two trends that everyone’s been discussing for a while. The trend that stuck out to me, which appears less well-appreciated, is the trend towards more Frac stages per well. A couple operators were discussing shifting towards 40 to 50 stage wells and, well was actually discussing pushing towards 90 stage wells. Are you seeing this trend in the Permian? And if so, can you discuss the impact on the requisite pump time to complete these wells?

HAL: we are seeing a move towards shorter spacing on the stages which ultimately drives more stages. And this will drive more service intensity for us. More stages means more plugs, means more perks, means more sand. So you get the point. But let’s don’t forget that the most important thing is making a better well, ultimately which involves stimulating more rock. And so I would say that the precise placement of the sand is probably the most important thing and that’s where we spend our time is optimal Frac design and placement. And really further precisely why we focus so much around sub-surface insight and ultimately how to make a better well.

Q:   And just generally, are you seeing operators outside of the Permian squeeze the spacing as well? Or is this just a Permian phenomenon?

HAL:  I’d say that what’s right is what’s right for the rock. And I think you’re seeing that move in the Permian basin. Probably less so in other places, though, constantly trying new ways to again get more sand in the right place as opposed to just more sand.

Q:  you’ve got a loaded frac calendar according to Jeff’s commentary, Dave’s commentary, completions lagged activity in the third quarter and now starting to pull through in the fourth quarter. Why wouldn’t completions be – why wouldn’t completions and frac activity at Halliburton’s North American top line outpace the rig count in Q4.

HAL:   Let me take that one. I think, as Jeff said the frac calendar is full, but my 20 years or so of being in charge of this thing shows me that customers like to grab optionality in the fourth quarter by filling the frac calendar. And it doesn’t always come true that we utilize that work and that calendar can get dumped pretty aggressively toward the end of the year, toward the end of the fourth quarter. So we’re just cautioning people that we don’t know yet. It’s really up to our customers as to whether they’re going to go forward and turn the optionality into real work.

HAL:  My experience has been some years it happens, but most years they start to pull things off the calendars as the holidays get there. And you’ve got the added I think dimension this year of where the commodity price is, what they can buy. Are they going to spend their money, buy in strips for next year? Are they going to basically want to continue to use these high spec rigs in a sporadic way, or just wait until next year where they can run them out on a pad and run them for 60, 80, 90, 100 days and get the efficiencies from them? So we’re just trying to draw a little bit of caution out there that there’s probably more variables in this Q4 than typically there might be because we’re bouncing off the bottom at this point in time.

Q:  If I just do back of the envelope stuff, you guys buy and supply to your customers a great deal of sand. I’m coming up at least $1.5 billion a year that comes through. Does that all come through your income statement, Mark? And is there a margin to that? Or if I were to take the sand pass through revenues off your income statement, would that have the appreciable benefit to margins? Am I looking at this right?

HAL:   yes, we do buy sand for our customers’ account. That’s on the ticket. We bill, in a typical market, we would bill that sand with a margin that’s designed to recover the cost of the delivery. We do the delivery. We take it to mine. We move it by rail through trans-loading and essentially arrange logistics to move the last mile to the well site. We don’t articulate all that cost out but the margin is designed to recover that cost and put it in line with the other margins that we have across the pumping and other service side of our business. Obviously what’s happening right now is we’re not earning a margin on a lot of that business.

HAL:  In some cases, we may, but the practical reality when you’re negative in North America, particularly on the pressure pumping side you’re not making money on the sand. You can look at it as if right now we’re buying sand for our customers’ accounts. That’s not a sustainable practice. So that’s a large part of what we’re trying to repair. But we do believe that our ability – the scale of the operation that we have, the amount of sand that we move, the quality and the efficiency of the trans-loading operation that we provide is a significant value add to our customers. We can make sure that it arrives on time and in quantity when supplies get tight, or logistics get complex, they don’t have to worry about working with Halliburton to get it there. And we’re never waiting on sand.

Q:  The Permian is very much the focus among E&Ps today, particularly the Delaware and the midland. It appears that the recovery and activity is less broad based than last cycle and more limited to the Permian. How do we think about competition in that market? mix of wells and customers? How some of that has an impact on margins and pricing in that basin?

HAL:   The Permian basin is the most competitive basin in North America today. It’s had the majority of the rig adds were in the Permian basin. Quite a mix of customers that added rigs doing a variety of things. As we’ve already talked about some vertical wells, some proving up acreage, just a range of activity. You’re starting from a smaller base in other parts of the country. Are we seeing some pickup? Yes, in the rig count. That’s part of the reason we stay engaged in all parts of the market. So I think that Permian from an activity standpoint will be busy. But again, it’s a highly supplied marketplace as well.

Q: What are you seeing if anything in terms of larger job requests from your clients? Either term work, multi-well pads versus the real structured spot work we’ve seen? Where does that stand in terms of the evolution of backlog for you guys?

HAL:  Yeah, we’re obviously seeing some increase in that in terms of both terms and size. Obviously we’re not going to comment on strategy at this point in time. But we manage through kind of the optionality and manage an entire portfolio.

HAL:  Yeah, I would just say listen, our customers are smart. They see 2017 shaping up to be better. And they’re going to try to lock in as much time and price as they can at this point in time. And it’s up to us to navigate our way through those requests and make sure that we are not only there to service them with the equipment they need, but we are there with a price that gives us the kind of returns we need to satisfy our own shareholders. So it’s going be a give and take but there’s certainly some of that going on right now.

The Halliburton Q3 earnings release is available here.

The Halliburton’s webcast of its Q3 conference call is available here.

Analyst Commentary

From Stephens:
HAL reported that NAM revenues grew 9% q/q on a 16% improvement in U.S. land rig count, yet cost control efforts led to a margin beat. 3Q revs of $3.83 bil. were below cons./us at $3.91 bil./$3.95 bil. while EPS of $0.01 beat cons./us both at ($0.06). Improved utilization in NAM drove 41% incremental op. margins in the segment despite top-line underperformance vs. rig count, and combined with effective cost management in the E. Hemisphere (see details below) consolidated op. margin of 13.1% beat us at 12.0% and improved 118 bps q/q. We continue to recommend shares of HAL because of its NAM leadership and we would expect HAL to continue to gain market share and benefit from U.S. Land activity growth given commodity stability >$45/bbl. We remain OW with a $50 PT.
3Q16 Revenue
• Actual: $3.83 bil.
• Cons.: $3.91 bil.
• Stephens: $3.95 bil.
• Actual: $503 mil.
• Cons.: $471 mil.
• Stephens: $476 mil.
3Q16 Op. EPS
• Actual: $0.01; GAAP was $0.01
• Cons.: ($0.06)
• Stephens: ($0.06)

Positives. NAM op. margins of (4.0%) beat our above consensus est. at (5.0%) and improved 420 bps q/q with increased U.S. land utilization driving the performance improvement. E. Hemisphere margins improved 100 bps q/q despite (4.5%) q/q decline in revs. FcF of $184 mil. beat our $121 mil. est. and improved $135 mil. q/q.

Negatives. LAM declines continue due to country specific weaknesses. NAM rev growth of 9.4% q/q missed our 14.5% est. and compared to U.S. land rig count q/q increase of 16%. Company notes cautious outlook into 4Q due to seasonal factors and holidays. International business outlook remains muted.

Call. 8:00 a.m. (CT). Dial-in: (866) 854-3163, Passcode: N/A.

From Wolfe Research:

(HAL – $47.07 – Outperform)
3Q Beat on Margins; Modest Positive for Stock
 3Q Margin Beat (Costs); Topline Misses (See Variance in Link) – EPS of 1c beat WR/Cons EPS of -7c/-7c. Adjusting for our modeled/guided tax rate (50%), EPS was -3c. Light revs, both INTL and NAM (see variance), were more than offset by better-than-expected NAM and ECA margins as a result of cost cuts. NAM revs up only 9% vs the US total / Hz rig count up 14% / 16% q/q, missing guidance for them to o/p rig activity by “several hundred bps.” This was expected though (Cons = +11% q/q), following softening commentary at a conference in September. NAM operating mgns up 420 bps q/q to -4.0%, resulting in 41% incrementals. INTL revs down 6% seq, while margins improved 47 bps q/q to 11.1%.
 Seasonally Cautious in 4Q for NAM & INTL Guided Flat Sequentially – NAM: operations improving and expect “increased commodity price to stimulate rig count growth,” yet remains cautious on 4Q activity “due to holiday and seasonal weather-related downtimes.” Int’l: expects 4Q results flat sequentially due to minimal YE sales and ongoing pricing pressure offset by lower costs. Pricing: Overall, softening tone around pricing presure, at least towards NAM. Last qrt commentary noted “continued pricing pressure around the globe,” but today’s release only included negative commentary around INTL pricing pressure. Maybe NAM pricing has finally stabilized.
 Slight Positive Revisions Likely– Generally, outlook commentary implies modest upside to 4Q consensus, with plausible EPS of -2c to +2c (Cons = - 3c) and $530-575mm of EBITDA (Cons = $529mm) if we assume NAM revenues are up 10-15% sequentially (current Hz rig count +16% vs 3Q avg) with incrementals of 20-30%. Recall INTL is guided flat q/q. As for ’17, Consensus (Cons EPS/EBITDA = 88c/$3.29bn) looks reasonable as long as NAM topline grows at 40-50% (WR = +50% y/y) and generates 30-35% incrementals (WR = 30%). We see modest upside to our 4Q and ’17 EPS/EBITDA estimates of -4c/$531mm and 81c/$3.17bn.
 Stock Reaction; Modest Positive – Overall, solid operational and EPS beat, along with strong FCF ($860mm). Stock should do fine today, likely modestly outperforming as 4Q (and possibly ’17) Consensus revised a tad higher. Reiterate OP rating.  

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