Activity resurgence creates growth opportunity
Halliburton (ticker: HAL) held an operational update call today, giving participants the latest news as to the company’s operations and sales. According to Halliburton CEO Dave Lesar, the North American service market has changed significantly in the last nine months.
Halliburton said its customer base is essentially made up of three types of companies:
- Some companies are looking to grow production by outspending cash flow;
- Some are looking to improve returns by living inside their cash flow;
- Some are preparing themselves for sale and propping up reserves.
‘The animal spirits are back in U.S. land’: Lesar
According to Lesar, “This diverse and exciting market has created a surge of activity and supports my thesis that the animal spirits are back in U.S. land.”
Halliburton, like other service companies, was hit hard by the downturn in oil prices.
The company was forced to cut costs quickly in order stay in operation. Margins, therefore, suffered. The recent resurgence in U.S. activity, however, has provided an opportunity to begin to normalize margins. According to Lesar, “it will come as no surprise that we have experienced a substantial increase in demand for our land-based services. In fact, we expect our U.S. land revenue growth to be up 25% quarter-over-quarter.”
Halliburton has decided to reactivate equipment faster than originally planned to take advantage of the recent activity boom.
The company estimates that the cost of equipment reactivation is about $0.01 per share per spread. By doubling the rate of reactivation and bringing most fleets online in the first half of 2017, Halliburton is frontloading the hit to income to the beginning of the year. Lesar believes that the boost to future profitability will more than make up for this cost, though.
Sand spot prices double contracted rates
In addition to equipment and the personnel to run it, Halliburton reports its largest source of cost inflation is sand. While the company has contracts for sand that supply 60% of its need, it must turn to the spot market for the rest.
Increases in both the sand needed per well and the number of wells being completed have created very high demand for sand. Some grades of sand on the spot market close at double contracted prices. Lesar does not believe this situation will continue, though. “I believe this will correct itself,” he said, “because the adequate sand volumes exist and pricing will ultimately abate as spring arrives, mining begins and new capacity comes online.”
In conclusion, Lesar stated that nothing has fundamentally changed in North American unconventionals that would prevent Halliburton from achieving historical margins and returns. The current activity boom has created a strong growth opportunity that Halliburton is working to take advantage of.
