Earnings Preview: Halliburton

Major oilfield services provider Halliburton Company (HAL - Analyst Report) is scheduled to report its second quarter 2012 results on Monday July 23 before the start of trading.

The Zacks Consensus Estimate for the to-be-reported quarter is a profit of 75 cents per share (with a downside risk of 1.33%) on revenues of $6.9 billion. In the year-ago quarter, Halliburton recorded a gain of 81 cents per share, while sales came in at $5.9 billion.

First Quarter Recap

Halliburton’s first-quarter 2012 results came in better than expected, helped by the strength and sustainability of the all-important North American onshore activity levels (to which the company is heavily leveraged through its market-share-leading pressure-pumping business).

Earnings per share, excluding special items, came in at 89 cents, beating the Zacks Consensus Estimate of 86 cents and comfortably ahead of the year-ago adjusted profit of 61 cents.

Revenues of $6.9 billion were 30.0% greater than that achieved during the first quarter of 2011 and also surpassed the Zacks Consensus Estimate of $6.8 billion, as sales increased across the company’s business units.

(Read our full coverage on this earnings report: Halliburton Tops Estimates Yet Again).

Points to Ponder for Second Quarter

Halliburton enjoys a strong competitive position within the global oilfield services markets. We like the company’s broad and technologically-complex product and service offerings, along with its robust financial profile.

It remains the best-positioned company in the U.S. pressure pumping market, with significant acreage positions in the highest profile plays, such as the Haynesville, Eagle Ford shale and Bakken.

However, a higher-than-expected spike in the cost for guar gum – a key constituent of the company’s market-leading hydraulic fracturing ('fracking') procedure – will adversely impact its second quarter results.

Guar gum, a bean grown mostly in India, apart from being a dairy products thickener is also a main ingredient of the fracking process, which is used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals.

As per Halliburton, demand for guar gum has gone through the roof in North America following the growing use of fracking in the extraction of oil and natural gas liquids from shale. This has led to concerns about the commodity’s potential shortage later in 2012, thereby driving up guar gum prices more rapidly than previously expected

Additionally, the North American land rig count, which has experienced strong upward momentum over the last twelve months, may plateau in the near future as growth in highly-productive horizontal drilling has led to a natural gas supply overhang and relatively weak natural gas prices in the U.S. market. This is likely to be only partially offset by the continued growth of oil- and liquids-rich reservoirs. A slowdown in U.S. land drilling will adversely impact Halliburton’s business.

Agreement of Analysts

As a result of the above-mentioned factors, there has been a downward bias among Halliburton’s June quarter estimate revisions, particular over the past 30 days. Out of the 22 estimates for the second quarter of 2012, 5 have been revised downwards, while 4 have gone in the opposite direction.

Magnitude of Estimate Revisions

As a result of estimates being revised southward over the past 30 days, the Zacks Consensus Estimate for the quarter has dropped by a penny (from 76 cents to 75 cents).

Surprise History

The company has a history of positive earnings surprises, surpassing the Zacks Consensus Estimate in each of the last 4 quarters. Halliburton has performed consistently during this period with its average earnings surprise being 4.79%. This implies that the company has beaten the Zacks Consensus Estimate by 4.79% over the last four quarters.

However, this time around, we do not expect Halliburton – the second largest member of the oilfield services contingent after Schlumberger Limited (SLB - Analyst Report) – to surpass expectations, as it has been struggling to keep pace with the bursting guar prices, adversely affecting its North American margins and overall profitability.

Short-Term Rating

Halliburton shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.