Major oilfield services provider Halliburton Co. (HAL) reported better-than-anticipated third-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, excluding special items, came in at 58 cents, beating the Zacks Consensus Estimate of 56 cents and was comfortably ahead of the year-ago adjusted profit of 31 cents.
Revenues of $4.7 billion were 30.0% greater than that achieved during the third quarter of 2009 and also surpassed the Zacks Consensus Estimate of $4.6 billion, as sales increased across the company’s business units.
During the quarter, North America accounted for approximately 51% of Halliburton’s total revenues and 65% of its operating income.
Completion & Production Segment
Business-segment-wise, Halliburton’s Completion and Production segment revenues were up 10.9% sequentially and 45.8% year over year to $2.7 billion, reflecting increased activity in North America.
Segment operating income was $609 million, a 22.5% sequential increase and more than doubling from the year-earlier level. Operating income in North America increased significantly – $148 million sequentially and a whopping $449 million year over year – buoyed by strong results from U.S. land drilling and Canada. Higher service intensity has led to greater absorption of equipment capacity and further improvements in pricing power.
Internationally, operating income was down $36 million from the second quarter of 2010 and $80 million from the third quarter 2009 levels. The weakness over the preceding quarters was on account of activity curtailment in Mexico, lower vessel utilization, activity and completions sales in Norway, project delays in Algeria, reduced activity and mobilization costs for production enhancement in India, and softness of activity in Southeast and Central Asia.
Drilling & Evaluation Segment
Revenues from Halliburton’s Drilling and Evaluation business were marginally above (0.8% increase) second quarter levels but improved by a much healthier 13.8% year over year to $2.0 billion, propelled by higher activity in U.S. land, U.K., and Southeast Asia. Partially offsetting the positive factors were the effects of the deepwater drilling moratorium in the Gulf of Mexico.
The segment’s operating income fell 14.8% from the June quarter and 4.2% from the year-ago period to $271 million. Operating income in North America was $115 million during the quarter, down $16 million from the previous quarter (adversely affected by the deepwater drilling suspension) but up $87 million from the third quarter of 2009 (on strong U.S. land results). International operating income decreased $31 million sequentially and $99 million year over year, reflecting lower drilling activity in Mexico, Argentina and Norway, as well as project delays in Algeria.
Balance Sheet
Halliburton’s capital expenditure in the third quarter was $557 million. As of September 30, 2010, the company had approximately $1.9 billion in cash and $4.6 billion in long-term debt (including current maturities), representing a debt-to-capitalization ratio of 31.7%.
Outlook
Halliburton management pointed out that third quarter profitability was driven by the unique strength of its balanced geographic portfolio whereby , the company was able to benefit from the robustness of the North American markets and more than made up for flat international performance.
The world’s second-largest oilfield services company after Schlumberger Ltd. (SLB) believes that bullish near-term U.S. land drilling trends, where activity is being driven by oil and liquids rich plays, will make the reduction in gas activity less meaningful. Halliburton will continue to be a beneficiary of the bullish rig count fundamentals in the U.S., driven by horizontal drilling in the service intensive plays.
On the other hand, international markets, while definitely improving, appear to be experiencing uneven growth across several regions. Going forward, Halliburton anticipates steady, incremental increases in international activity that will lead to volume-led margin improvements as one move into 2011.
Halliburton currently retains a Zacks #2 Rank (short-term ‘Buy’ rating).
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