Halliburton: Another Strong Quarter – Analyst Blog (HAL) (SLB)

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Major oilfield services provider Halliburton Co. (HAL) reported better-than-anticipated first-quarter 2011 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 61 cents, beating the Zacks Consensus Estimate of 58 cents and were comfortably ahead of the year-ago adjusted profit of 28 cents.

Revenues of $ 5.3 billion were 40.4% greater than that achieved during the first quarter of 2010 and also surpassed the Zacks Consensus Estimate of $ 4.9 billion, as sales increased across the company’s business units.

During the quarter, North America accounted for approximately 56% of Halliburton’s total revenues and 82% of its operating income.

Segmental Performance

Completion & Production Segment: Business-segment-wise, Halliburton’s Completion and Production segment revenues were up 6.3% sequentially and 61.5% year over year to $ 3.2 billion, mainly reflecting sustained strength in U.S. land operations.

Segment operating income was $ 660 million, a 4.1% sequential decrease but almost tripling from the year-earlier level.

Operating income in North America increased significantly – $ 96 million sequentially and a whopping $ 477 million year over year – buoyed by increased demand and pricing gains.

Internationally, operating income was down $ 124 million from the fourth quarter of 2010 and $ 55 million from the first quarter 2010 levels. The reduction over the preceding quarters was on account of lower activity levels in Mexico, operational disruptions caused by geopolitical issues in North Africa, project delays in Kazakhstan, and startup costs in Iraq.

Drilling & Evaluation Segment: Revenues from Halliburton’s Drilling and Evaluation business were 3.0% below fourth quarter levels but improved by a healthy 17.4% year over year to $ 2.1 billion, propelled by higher activity in the Western Hemisphere and the start-up of work in Iraq.

The segment’s operating income fell 35.0% from the December quarter and 14.8% from the year-ago period to $ 230 million.

Operating income in North America was $ 118 million during the quarter, flat from the previous quarter (adversely affected by the muted Gulf of Mexico activity levels) but up $ 25 million from the first quarter of 2010 (on strong U.S. drilling activity).

International operating income decreased $ 128 million sequentially and $ 65 million year over year, reflecting operational disturbances due to geopolitical issues in North Africa, lower drilling activity in the North Sea, higher costs in Saudi Arabia and certain locations in Asia Pacific, as well as startup costs in Iraq.

Balance Sheet

Halliburton’s capital expenditure in the first quarter was $ 704 million. As of March 31, 2011, the company had approximately $ 1.0 billion in cash and $ 3.8 billion in long-term debt, representing a debt-to-capitalization ratio of 25.9%.

Outlook

Halliburton management pointed out that first quarter profitability was driven by strong demand for its services in North America, which more than offset the Eastern Hemisphere disappointment stemming from geopolitical disturbances, delays in Iraq, and typical seasonality.

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 horizontal drilling and liquids-rich plays, were able to make up for the disruptions in North Africa and decrease in activity in the Gulf of Mexico.

Going forward, Halliburton anticipates benefiting from demand improvements in select North American basins, as operators continue to make the exploitation of unconventional resources the focus of their investment.

At the same time, the company expects margins in Eastern Hemisphere to improve in the June quarter. However, Halliburton cautioned that they will continue to be adversely affected by the situation in Libya and by competitive pricing.

Our Recommendation

Halliburton shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Longer-term, we are maintaining our Neutral recommendation on the stock.

 
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