Halliburton's (HAL) Q3 Outlook: What Investors Need to Know

Oilfield services provider Halliburton HAL warned that third-quarter earnings would come in at the low end of its previous forecast. Speaking at the Barclays conference call on Wednesday, CEO Jeff Miller blamed North American activity slowdown for the drab outlook.

North American Jitters

With customers keeping a tight rein on spending in the face of depressed commodity prices, Barclays expects energy firms’ E&P capital expenditure growth to clock a miserly 2% this year. This is down from the January projection of 9%. Worse, the companies are likely to invest 15% less in the second half of this year compared to the first six months.

As proof of waning activity levels, oil services player Baker Hughes, a GE company BHGE recently said that rigs engaged in exploration and production in the U.S. totaled 904 for the week ended Aug 30, 14% less than a year ago.

In particular, the number of oil-directed rigs (at 742) is at its lowest since January 2018. The current total, far from the peak of 1,609 attained in October 2014, is also lower than 862 a year ago.

Meanwhile, the current nationwide natural gas rig count (at 162) has plunged to levels last seen in mid-April 2017. It is well below the previous year’s rig count of 184 and 90% below the all-time high of 1,606 recorded in 2008.

For operators in North America, where oil production has reached record levels, it’s more about the returns and not growth. The volatility in commodity price has convinced explorers and producers to take a relatively conservative approach on capital expenditure programs. This shift in customer strategy has resulted in an equipment supply glut thereby squeezing profitability on services like fracking.

Halliburton – world’s biggest provider of fracking equipment to oil and gas producers with operations heavily weighted toward North America – also sees widespread consolidation in the industry spurred by plateauing drilling in the U.S. shale patch amid the trend of strict capital discipline. However, the world's second-largest oilfield services company after Schlumberger SLB is unlikely to participate in this phase, ruling out mergers and acquisitions. Adhering to its cautious approach to capital expenditure, Miller pledged to spend less in 2020.

International Markets to the Rescue

While headwinds will continue in North America in the form of softness in activity, the international markets have started to turn around on spending uptick and should continue to ramp throughout the year. CEO Jeff Miller sees customers reviving spending on drilling and completion projects across all regions outside North America – land, offshore and unconventional.

In particular, offshore projects are likely to drive the narrative going forward with an increase in the number of final investment decisions, eventually progressing to the development stage. Halliburton's offshore business lines should benefit from these trends and win new contracts, which are usually highly profitable and have long cycles.

Halliburton's international revenues increased 12% throughout the first half. It anticipates sales from the region to grow at a high single-digit rate in 2019, with further improvement next year. The company is reaping the benefits of the massive investments it made in years before the commodity bloodbath started.

Jeff Miller, the CEO, added that the Production Chemicals and Artificial Lift businesses will be built out to target large, mature fields. In fact, revenues from completion activity has been contributing more to international sales of late as oil producers look to develop mature fields.

Zacks Rank & Key Picks

Halliburton holds a Zacks Rank #3 (Hold).

Meanwhile, investors interested in the energy space could look at a better option like National Oilwell Varco, Inc. NOV that sports a Zacks Rank #2 (Buy). Over 30 days, the Houston, TX-based National Oilwell Varco has seen the Zacks Consensus Estimate for 2019 and 2020 increase 92% and 100%, respectively.

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

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National Oilwell Varco, Inc. (NOV) : Free Stock Analysis Report
 
Schlumberger Limited (SLB) : Free Stock Analysis Report
 
Halliburton Company (HAL) : Free Stock Analysis Report
 
Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
 
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