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Factors to Know Ahead of Halliburton's (HAL) Q4 Earnings

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Halliburton Company (HAL - Free Report) is expected to release fourth-quarter 2018 results before the opening bell on Tuesday, Jan 22. The current Zacks Consensus Estimate for the quarter under review is a profit of 37 cents on revenues of $5.9 billion.

In the preceding three-month period, the major oilfield service provider beat the consensus mark by 2% after robust international activity more than offset slowdown in the North American drilling fluids demand and pricing pressure in the United States land drilling business.

As far as earnings surprises are concerned, the Houston, TX-based company is on a firm footing, having gone past/met the Zacks Consensus Estimate thrice in the last four reports. This is depicted in the graph below:

Halliburton Company Price and EPS Surprise


Halliburton Company Price and EPS Surprise | Halliburton Company Quote

Investors are keeping their fingers crossed and hoping that the provider of technical products and services to drillers of oil and gas wells can continue winning ways by surpassing earnings estimate this time around too. However, our model indicates that world's second-largest oilfield services company after Schlumberger (SLB - Free Report) might not beat on earnings in the fourth quarter.

Let’s delve deeper and find out the factors impacting the results.

Factors to Consider This Quarter

Strong commodity prices typically lead to robust upstream activities. As exploration, drilling, and production picks up, oil service providers see a surge in their sales and profitability.

With the West Texas Intermediate (or WTI) crude oil prices crashing in the past quarter, clients are taking a more conservative approach on their investment decisions. Oil prices around the $50 a barrel mark is certainly not enough to trigger investments in mature field development, exploring unconventional resources, or expanding offshore programs. This slowdown in activity hurts overall demand for services and equipment across the industry spectrum and does not bode well for Halliburton’s upcoming earnings release.

Interestingly, during the fourth quarter of 2018, the U.S. rig count increased by 29 (from 1,054 to 1,083) despite the oil price crash. While there is a typical delay of around three-four months between oil price changes and its reflection on rig counts, the statistics suggest steady North American activity in the October-December time frame. Halliburton, with sizable presence in the region, is expected to gain favorably on this sentiment.

Meanwhile, pipeline takeaway capacity constraints in the Permian Basin seems to be the primary reason for apprehension about Halliburton’s prospects. Halliburton warned that a slowdown in the oil and gas rich-Permian Basin activity due to pipeline constraints will be a drag on fourth-quarter earnings.

By now, it is well documented that serious logistical constraints in West Texas’s Permian ‘super basin’ is forcing operators in the region – especially those without committed pipeline capacity – to sell their produce at hefty discounts. This caused operators to slow down their drilling and production activity, impacting demand for oilfield services. In fact, there is a backlog of nearly 3,800 drilled but uncompleted wells in the Permian Basin - indicating a slowdown in well completion activity.

As a proof of the market challenges, the Zacks Consensus Estimate for fourth-quarter Completion and Production adjusted operating income is pegged at $466 million, lower than $613 million reported in the previous quarter. To put things in perspective, the Completion and Production unit makes up more than three-fourths of the oilfield service provider’s total operating income.

Earnings Whispers

Our proven model does not conclusively show that Halliburton will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, for this company stands at +2.28%. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: However, Halliburton’s Zacks Rank #5 (Strong Sell), when combined with a positive ESP makes surprise prediction difficult.

As it is, we caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Halliburton, here are some companies from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Murphy USA Inc. (MUSA - Free Report) has an Earnings ESP of +29.37% and a Zacks Rank #3. The firm is expected to release earnings on Jan 30. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Helmerich & Payne, Inc. (HP - Free Report) has an Earnings ESP of +4.12% and a Zacks Rank #3. The company is anticipated to release earnings on Jan 30.

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