Halliburton Co. (HAL) – one of the largest oilfield service providers in the world – reported significantly better-than-anticipated second-quarter 2010 results. This was helped by the strength and sustainability of the all-important North American onshore activity levels (to which the company is heavily exposed through its market-share-leading pressure-pumping business).
 
Earnings per share from continuing operations came in at 52 cents, comfortably beating the Zacks Consensus Estimate of 37 cents and the year-ago adjusted profit of 30 cents (excluding employee separation costs).
 
Revenues of $4.4 billion was 25.6% greater than that achieved during the second quarter of 2009 and also surpassed the Zacks Consensus Estimate of $4.1 billion, as sales increased across the company’s business units.
 
During the quarter, North America accounted for approximately 48% of Halliburton’s total revenues and 54% of its operating income.
 
Completion & Production Segment
 
Business-segment-wise, Halliburton’s Completion and Production segment revenues were up 21.8% sequentially and 36.6% year over year to $2.4 billion, reflecting increased activity in North America.
 
Segment operating income was $497 million, more than doubling from the previous quarter as well as from the year-earlier level. Operating income in North America increased significantly – $173 million sequentially and $258 million year over year – buoyed by strong results from U.S. land drilling. Higher service intensity has led to greater absorption of equipment capacity and further improvements in pricing power.
 
Internationally, operating income was up $86 million from the first quarter of 2010, while it declined marginally (by $4 million) from the second quarter 2009 levels. The healthy gain over the previous quarter was on account of improved performance in Mexico and Colombia, strong demand for production enhancement services in Congo, Algeria, and the North Sea, increased demand for completion tools in Nigeria and Norway, and strong completions and production enhancement activity across Middle East/Asia.
 
Drilling & Evaluation Segment
 
Revenues from Halliburton’s Drilling and Evaluation business was up 11% sequentially and 14.5% year over year to $2 billion, propelled by higher activity in North America, Latin America, and Middle East/Asia.
 
The segment’s operating income rose 17.8% from the March quarter and 12% from the year-ago period to $318 million. Operating income in North America was $131 million during the quarter, up $38 million from the previous quarter and $103 million from the second quarter of 2009, mainly on the back higher horizontal drilling activity across onshore U.S. Latin America operating income increased $38 million sequentially and $2 million year over year, reflecting improved drilling activity in Mexico and higher testing activity in Brazil. These were partly offset by lower activity in the North Sea and certain locations in West Africa, which dragged down Europe/Africa/CIS earnings by $38 million from the previous quarter and by $33 million from the year-ago period.
 
Balance Sheet
 
Halliburton’s capital expenditure in the second quarter was $451 million. As of June 30, 2010, the company had approximately $1.2 billion in cash and $4.6 billion in long-term debt (including current maturities), representing a debt-to-capitalization ratio of 32.8%.
 
Outlook
 
Halliburton management pointed out that second quarter profitability was driven by increased activity in the unconventional oil and gas shale plays in North America, aided by anticipated seasonal recovery of markets in the eastern hemisphere and improved activity in Latin America.
 
However, the world’s second-largest oilfield services company after Schlumberger Ltd. (SLB) cautioned that 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 partially offset by the continued growth of oil- and liquids- rich reservoirs. 
 
The firm also believes that the huge oil spill accident in the Gulf of Mexico (GoM) and the subsequent deepwater drilling suspension will reduce its earnings by 5 – 8 cents per quarter for the remainder of 2010.
 
As a reminder, on Apr 20, offshore driller Transocean Inc’s (RIG) ultra-deepwater Horizon drilling platform, contracted to British major BP Plc (BP), sank following an explosion while operating in the U.S. GoM off the coast of Louisiana. The incident killed 11 workers and caused what is considered the worst oil spill in U.S. history. Halliburton, which provided blowout-prevention equipment, had been embroiled in the incident.
 
Our Recommendation
 
We like Halliburton’s leading position in the global oilfield services market, its geographic and operational diversity, and its robust financial profile. The company, with its broad and technologically complex product and service offerings, enjoys a strong competitive profile.
 
Despite this, we are compelled to maintain our Zacks #3 Rank (Hold) rating on the stock over the coming 1-3 months, mainly due to weak natural gas fundamentals.
 
Read the full analyst report on “HAL”
Read the full analyst report on “SLB”
Read the full analyst report on “RIG”
Read the full analyst report on “BP”
Zacks Investment Research