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Will E&P Capex Slowdown Mar Halliburton's (HAL) Q2 Earnings?

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Halliburton Company (HAL - Free Report) is expected to release second-quarter 2019 results before the opening bell on Monday, Jul 22. The current Zacks Consensus Estimate for the to-be reported quarter is a profit of 30 cents on revenues of $6 billion.

In the last reported quarter, the major oilfield service provider met the consensus mark on robust international activity, offsetting pricing pressure in the North American business.

This Houston, TX-based company beat/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 price-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 its winning ways by surpassing earnings estimate this time around. However, our model indicates that the world's second-largest oilfield services company after Schlumberger (SLB - Free Report) might not beat on earnings in the second quarter.

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

Factors to Consider This Quarter

E&P Capital Discipline: Clients are taking a more conservative approach on their investment decisions. Per the new paradigm in the energy sector, a disciplined capital expenditure strategy (resulting in free cash flow) is being prioritized over reckless spending beyond operating cash flows. Consequently, major upstream oil companies are now committed to investor returns rather than adding production by outspending cash flows. This has created an extremely challenging operating environment for the service providers as there is not enough incentive 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.

Lower Rig Count: Moreover, during the second quarter of 2019, U.S. oil rig count decreased by 23, from 816 to 793. While there is a typical delay of around three-four months between oil price changes and its reflection on rig counts, the statistics suggest weakening North American activity in the April-June timeframe. Halliburton, with sizable presence in the region, is expected to suffer significantly on this sentiment.

Permian Takeaway Constraints: By now, it is well documented that logistical constraints in West Texas’s Permian ‘super basin’ is forcing operators in the region – especially those without committed pipeline capacity – to slow down their drilling and production activity, impacting demand for oilfield services. In fact, there is a backlog of more than 4,000 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 second-quarter Completion and Production adjusted operating income is pegged at $430 million, lower than $669 million reported in the year-ago 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.

What Does Our Model Say?

Our proven model too 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.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, for Halliburton stands at -0.05%.

Zacks Rank: Halliburton has a Zacks Rank #5 (Strong Sell). As it is, we caution against Zacks Ranks #4 (Sell) or 5 stocks 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:

Helix Energy Solutions Group, Inc. (HLX - Free Report) has an Earnings ESP of +13.33% and a Zacks Rank #1. The company is anticipated to release earnings on Jul 24. You can see the complete list of today’s Zacks #1 Rank stocks here.

TechnipFMC plc (FTI - Free Report) has an Earnings ESP of +2.51% and a Zacks Rank #3. The company is likely to release earnings on Jul 24.

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