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Will Soft Completion Market Mar Halliburton's Q4 Earnings?

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Halliburton Company’s (HAL - Free Report) Completion and Production segment — which makes up around 68% of the oilfield service provider’s total revenues and 80% of its operating income — could post disappointing results in fourth-quarter 2018. This would jeopardize Halliburton’s chances of notching up a quarterly outperformance when it reports on Tuesday, Jan 22.

(See more in Factors to Know Ahead of Halliburton's Q4 Earnings)  

The Completion and Production segment supplies cementing, stimulation, intervention, and completion services. The unit comprises of production enhancement services, completion tools and services, and cementing services.

A Look at Halliburton’s Completion and Production Performance in Q3

Completion and Production revenue was essentially flat sequentially though it increased 17.9% from the year-ago level. Operating income from the segment was $613 million, 16.3% above the year-ago level of $527 million. The division’s performance was helped by higher completion tool sales and well intervention services in the Eastern Hemisphere, coupled with improved stimulation activity in Mexico.

However, the unit deteriorated from previous quarter’s income of $669 million and could not match our consensus estimate of $641 million. The shortfall could be attributed to pricing pressure and higher maintenance costs in the North American land drilling business.

Soft North American Completion Market to Weigh on Q4 Activity

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 infrastructure bottlenecks, apart from seasonal issues and budget exhaustions, 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 to WTI and Brent-linked benchmarks. This caused operators to slow down their drilling and production activity, impacting demand for oilfield services. In fact, there is a record backlog of nearly 3,800 drilled but uncompleted (or DUC) wells in the Permian Basin - indicating a slowdown in well completion activity.

Worryingly, the high DUC count means lower-than-expected demand for Halliburton’s completion tools and associated activities, which are needed once these wells are finalized.  

Completion and Production Unit to Suffer

In this backdrop, the vast backlog of DUC wells is likely to translate into potential revenue loss for Halliburton’s completion-directed services. As already mentioned, Halliburton gets about two-thirds of its revenue from the Completion and Production segment and therefore any weakness would get magnified in the Zacks Rank #5 (Strong Sell) company’s operating margin. Investors should note that the Completion and Production unit commands a much higher level of profitability than Halliburton’s other segment – Drilling and Evaluation.  

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

Consequently, the Zacks Consensus Estimate for third-quarter Completion and Production adjusted operating income is pegged at $641 million, lower than $669 million reported in the previous quarter.

Overall Earnings & Revenue Projections

Notably for the world's second-largest oilfield services company after Schlumberger (SLB - Free Report) , the Zacks Consensus Estimate for earnings of 37 cents reflects a 30% decline from the prior-year quarter profit of 53 cents. Also, the Zacks Consensus Estimate for sales of $5.9 billion indicates a 1% decrease on a year-over-year basis.

Our Take

Decline in drilling activity at the Permian Basin has led to weak demand for Halliburton’s completions equipment and services. This will hamper the company’s top and bottom-line growths.

Earnings Schedules of Other Major Oilfield Service Providers

Among the major players, Schlumberger is scheduled to release today, while Baker Hughes, a GE company will report on Jan 31. Weatherford International plc , another biggie, will report fourth-quarter earnings early next month.

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