Halliburton Net Falls but Tops View

 
Earlier today, Halliburton Company (HAL - Analyst Report) – one of the largest oilfield service providers in the world – reported better–than-anticipated third-quarter results, benefiting from its balanced global portfolio and broad spectrum of industry-leading services, especially in key unconventional resources. Earnings per share, excluding employee separation costs, came in at 31 cents, 5 cents above the Zacks Consensus Estimate.

Revenue & Profitability

On a year-over-year basis, Halliburton’s adjusted earnings per share was down more than 59% while revenue decreased 26% to $3.6 billion, hurt by continued pricing pressures in the all-important North American region to which the company is heavily exposed through its market-share-leading pressure-pumping business. During the quarter, North America accounted for approximately 36% of the company’s total revenue and 7% of its operating income.

Completion & Production Segment

Business-segment-wise, the Completion and Production segment revenue was up 4% sequentially but was down 29% year-over-year to $1.8 billion, while its operating income was $240 million, almost flat sequentially but 62% lower than the previous year quarter.

Continued weakness in North America was a drag on this segment, where operating income decreased $43 million sequentially and $395 million year-over-year, primarily due to pricing declines for production enhancement services in the U.S. This was partially offset by strong results in the Europe/Africa/CIS, reflecting higher demand for production enhancement services.

Drilling & Evaluation Segment

Revenue from the company’s Drilling and Evaluation business was up marginally (by 1.4%) sequentially but down 22% year-over-year to $1.7 billion. The segment’s operating income was flat from the March quarter, however, it fell more than 43% from the year-ago period to $283 million.

Operating income in North America was $28 million during the quarter, same as the previous quarter, though it plunged 83% from the third quarter of 2008 on the back of weakness in the Gulf of Mexico . This dragged down the segment profitability from the year-ago period, partly offset by higher activity in Russia and the Caspian.

Balance Sheet

Capital expenditure in the third quarter was $440 million, bringing the year-to-date figure of $1.4 billion.  At the end of the quarter, the company had approximately $1.7 billion in cash and $4.6 billion in long-term debt, representing a debt-to-capitalization ratio of 34.8%.

Outlook

Management indicated that weak global demand and volatility in the commodity markets are still weighing on the oilfield services industry. However, the company noted that Halliburton’s international operations, accounting for nearly 2/3rd of total sales, have held up reasonably well in the downturn and are expected to provide some cushion to the company’s near- to medium-term performance.

In fact, international revenue was up 3% sequentially despite a modest decline in activity levels. However, for the next few quarters, international margins will remain on the softer side due to project deferrals and pricing pressure.

Halliburton believes that North America margins have bottomed in most basins during the third quarter. But at the same time, the company expects fourth quarter profitability to be under pressure due to weather issues and customer expectations of a more favorable pricing outlook.

We currently rate Halliburton shares as Neutral.