Current HAL Stock Info

The flight to quality is happening: Jeff Miller

Halliburton (ticker: HAL) announced first quarter 2017 results today, showing a net loss of $32 million, or ($0.04) per diluted share. After adjusting for early extinguishment of debt, earnings were a profit of $34 million, or $0.04 per diluted share. This compares to nonadjusted and adjusted earnings of ($0.17) and $0.04 per share in Q1 2016, respectively.

U.S. revenue growth 30%

Total revenue was $4.3 billion, a sequential growth of 6% and year-over-year improvement of 2%. This growth was due primarily to growth in North America, where revenue increased 24%.

U.S. revenue showed surprisingly strong growth, with Halliburton’s 30% revenue growth outperforming the U.S. land rig count growth of 27%. Simultaneous increases in activity and service cost inflation drove these improved results. As the company outlined in its recent operation update, Halliburton is in the process of reactivating its equipment fleets at a furious pace. Most fleets will come back online in Q1 2017, frontloading the reactivation costs.

Waiting to build new equipment

Halliburton’s current strategy in North America focuses on maintaining market share, so that when normalized markets return the company can take advantage of a larger base of business. However, the company currently does not have significant plans to build new equipment.

Halliburton U.S. Revenue Growth Exceeds Rig Count Growth

Halliburton President Jeff Miller

According to Halliburton President Jeff Miller, “We believe that the industry’s active fleet of pumping equipment is fully utilized and we know from our own experience, as we get near the bottom of the stacked-equipment pile, it will be progressively harder and more expensive for the industry to reactivate equipment. Our experience through many cycles is that when this happens, we see a customer flight to quality due to their strong desire to make better wells and reduce their cost per BOE. Let me reiterate: we foresee increased demand for new-build equipment, but will not consider responding to this demand until the economics make sense.”

Revenue in Latin America grew by 8% sequentially, outperforming the typical seasonal decline. Increased activity in Brazil and Mexico were primary drivers of this growth.

Eastern Hemisphere markets, however, saw declines of 12%. Halliburton believes that the first quarter is the bottom of the international rig count, but the full year average for 2017 will be only marginally higher than the average for 2016.

International recovery depends on seeing strong price trends

The longer cycle of international investments means that international and U.S. markets react to changes in price differently. Miller remarked on this dynamic, saying “Our customers around the world have different breakeven thresholds and production requirements, but none are immune to the impacts of the current commodity price environment. We continue to see customers defer new projects, most notably in the offshore exploration markets. Due to lower cash flow and project economics, they are more focused than ever on lowering costs.

“In contrast to North America, where we believe that a $50 oil price would drive significant increase in activity, customers tell me the longer duration international markets will react less to an absolute oil price but more to a positive view of where a price will be for several years. This isn’t a surprise given the longer investment cycle many of our customers face.”

Q&A from HAL Q1 2017 conference call

Q: With a strong catch-up in completion activity you saw on U.S. Land this quarter, is it fair to say you think we’re entering a new completion-intensive phase of the cycle? And I was hoping you could talk a little bit about how you see that relationship between rigs and completion activity now. You previously talked about 900 being the new 2000 in terms of full industry utilization; I was just wondering if you could go into that math a little bit, see if it’s adjusted at all?

Jeffrey Allen Miller: Yes. Thanks, Dave. I mean there’s no doubt that the pace of completions activity is catching up with the rig count and we expect to see that relationship continue into next quarter, most certainly. It is partly around the increasing intensity continues to build, and when I said 900 was the new 2000, I probably undershot that number by a little – or overshot that number – in the sense that we are seeing that kind of tightness in the marketplace today.

Q: What do you think are the biggest impediments for the industry bringing this back? I mean do you think it’s going to be a shortages of repair? Is it finding and training crews? Is it something else? And secondarily, you had talked about in your prepared remarks about a flight to quality. I was just wondering if we’re starting to see that yet? I mean are customers starting to experience the poor jobs or equipment-delivery delays? Or is that a little bit further out?

Jeffrey Allen Mille: Well, look, the flight to quality is happening and that is what we see: when equipment comes into the market, and most importantly, as clients get urgent, reliability, service quality and technology even matter more. And so we are confident that that pivot to what we deliver will continue through the marketplace. As far as things that are tight, equipment broadly is tight I think for the industry today. Sand is one of those things that will recover in terms of availability. There’s a lot of capacity coming into the market. And then from a people perspective, we’re confident with where we are on people. It is partly because we retained our folks, our most experienced people, through the downturn and we know how to hire folks. We hired 21,000 in 2014.

Q: So just going back to the construction comments you made in your prepared remarks in the Q&A here, you said that given that you build in-house, you can wait longer before you start to build. Can you give us a little perspective of your construction time for that equipment? And has the cost structure changed from building this cycle versus the last cycle?

Jeffrey Allen Miller: Yes. So I would say that we’ve seen the cost come down somewhat around the cost of building equipment. As we look out at what’s available or what we can do in the marketplace, I think also some of that’s our own value engineering as we think about how we take costs out of things and still achieve the same effective market-leading equipment. With respect to timing, I’m not going to give you the precise timing, but it is going to be faster than anyone else simply because we control that part of the value chain in our manufacturing facility. And that allows us to make no decision, certainly at this time, and I think we can wait fairly deep into the cycle before we make any kind of decision about whether or not we bring out new equipment.

Q: Jeff, you mentioned in your comments something regarding operator budgets, the absolute oil price maybe not as important as perceptional and stability and where it’s going to be for the next several quarters. If we’re in a $50 to $55 world for an extended period, what is your sense on your, number one, how international revenue would kind of progress? But then also, how do we think about your margins in that environment as well? It sounds like price pressure continues in certain areas. Can you maybe talk about revenue outlook in a kind of low-to-mid-50s-type environment and how we could think about your international margins, perhaps for the back half of the year and maybe on a longer-term basis?

Jeffrey Allen Miller: Well, I think what we see is the stress in that part of the market is simply a cost piece of the issue. So how do we bring costs down to make a lot of those plays more competitive, and I think our customers are working on that now. But it doesn’t change sort of the macro view that, as North America is more competitive, where does that put some of these other markets?

And our strategy is working with our customers but it works slowly and in terms of bringing that cost down. So as we look out, I think it’ll be muted in a range-bound world that Deepwater will be the slowest to come back. I think there is room to move around in the mature fields and I think those will recover probably ahead of that in terms of activity, which is what we’re seeing through the balance of the year. But it is very competitive given the amount of equipment that is out around the world today.

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