Summary
- The market conditions for oilfield service providers remain challenging in North America, with weak investment from E&Ps and an excess capacity of fracking equipment.
- Halliburton is now focusing on reducing costs and improving its profit margins in North America.
- Halliburton, which has expanded its footprint outside of North America, will benefit from the ongoing recovery in international markets.
Halliburton (HAL) continues to face a tough business environment in North America. However, the company is taking a number of steps that should help it in preserving earnings and profit margins. Halliburton seems to be on the right track, one that could make it a high-margin operator that can generate decent profits and returns, even during challenging times.
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The oilfield service providers are operating in a tough business environment, as I’ve discussed in previous articles (such as here and here). The sector is still reeling from the impact of the oil price crash that began in 2015 and forced oil producers to slash capital expenditure, leading to significant losses and job cuts in the oilfield services space. The service providers, who gave steep discounts to the oil producers during the tough environment, gradually started increasing prices as oil recovered from less than $30 a barrel in early-2016 to more than $70 in mid-2018. But before the service companies could turn around, oil prices crashed again by 40% to $43 by the end of last year. Since then, prices have recovered to $56 at the time of this writing but the volatility has knocked the confidence of oil producers who continue to keep a lid on exploration and production spending. The shale drillers such as Pioneer Natural Resources (PXD) and EOG Resources (EOG) are now focusing on returning cash to shareholders instead of aggressively growing production.
Oil and gas producers have removed several rigs this year. There were a total of 954 rigs operating in the US at the end of last week, data from Baker Hughes a GE Co. (BHGE) shows, down from 1,046 rigs in the same period last year. Halliburton and Schlumberger (SLB), two of the biggest oilfield service companies in the world, have also talked about the weak state of the US market. Last week, Schlumberger said the exploration and production spending in North America’s land market will decline by roughly 10% this year. Halliburton has admitted that the hydraulic fracturing market is oversupplied. Rystad Energy has estimated that there will be 24.4 million horsepower of fracking equipment by the end of the year in a market where demand is expected to be just 14.5 million. This excess supply has put pressure on pricing levels. This puts Halliburton in a tough spot since it is the world’s biggest provider of fracking equipment and holds a leading position in the North America.
However, what I like about Halliburton is that it is dealing with the market weakness in the best way it can by focusing on preserving its margins, returns, and cash flows. The company is trying to reduce costs and maximize equipment utilization to improve its profitability. Halliburton has restructuredits North American business by removing layers of management which should not only make the company more responsive to changes in the market’s dynamics but also reduce its operating costs. The company has also trimmed 8% of its North American workforce. The company is also actively working to reduce input costs by collaborating with its supply chain and logistics partners.
More importantly, Halliburton has previously captured market share from its rivals by maintaining ample supplies of fracking equipment and offering its services at discounts. But this time, Halliburton revealed that it shelved equipment in the previous quarter and could further reduce its fleet size as it tries to rebalance the market. I think this shows that protecting margins and returns has become a top priority. The company’s decision to stack equipment may drag revenues and Halliburton may even lose some market share. But it will also push the maintenance costs lower, utilization might improve, and the profit margins may also move higher.
