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Will E&P Capex Slowdown Mar Halliburton's (HAL) Q3 Earnings?

Zacks Equity Research

Halliburton Company HAL is expected to release third-quarter 2019 results before the opening bell on Monday, Oct 21. The current Zacks Consensus Estimate for the to-be reported quarter is a profit of 34 cents on revenues of $5.8 billion.

The Zacks Consensus Estimate for third-quarter earnings has been revised downward 8.1% in the past 60 days. Given this backdrop, let’s delve into the factors that might have influenced the company’s performance in the September quarter.

Factors to Consider This Quarter

E&P Capital Discipline: Clients have been taking a more conservative approach on their investment decisions. Consequently, major upstream oil companies are now committed to investor returns rather than adding production by outspending cash flows. This has created an extremely challenging operating environment for the service providers as there is not enough incentive to trigger investments in mature field development, exploring unconventional resources, or expanding offshore programs. This slowdown in activity is likely to have hurt demand for Halliburton’s services and equipment in the third quarter.

Lower Rig Count: Moreover, during the third quarter of 2019, U.S. oil rig count decreased by 75, from 788 to 713. While there is a typical delay of around three-four months between oil price changes and its reflection on rig counts, the statistics suggest weakening North American activity in the April-June timeframe. Halliburton, with sizable presence in the region, is expected to reflect this impact in the to-be-reported results.

Huge Backlog of Uncompleted Wells: The crude price spike of 2014, which saw the commodity breach the $100-a-barrel level, led to massive expansion in domestic drilling. However, the subsequent commodity price crash forced a number of producers to defer the 'fracking' of the wells. Investors should know that fracking – which follows drilling – is used to complete the well and get the oil flowing. This led to a huge backlog of drilled but uncompleted wells, impacting demand for oilfield services. In fact, there is a backlog of around 3,700 drilled but uncompleted wells in the Permian Basin alone.

As a proof of the market challenges, the Zacks Consensus Estimate for third-quarter Completion and Production adjusted operating income is pegged at $451 million, lower than $613 million reported in the year-ago quarter. To put things in perspective, the Completion and Production unit makes up more than three-fourths of Halliburton’s total operating income.

Recovery in International Operations: One bright spot in the otherwise gloomy earnings outlook is the recovery in overseas markets. Halliburton's international revenues increased 12% throughout the first half, a trend that most likely continued in the third quarter because of increased customer spending on drilling and completion projects across all regions outside North America – land, offshore and unconventional.

Highlights of Q2 Earnings

In the last reported quarter, the major oilfield service provider beat the consensus mark on robust international activity.

In the last reported quarter, the world's second-largest oilfield services company after Schlumberger SLB reported earnings of 35 cents per share that surpassed the Zacks Consensus Estimate by 5 cents. The bottom line, however, decreased 39.7% on a year-over-year basis, primarily owing to weakness in the North American market. Revenues of $5.9 billion were 3.5% lower than the year-ago quarter and missed the Zacks Consensus Estimate by a marginal 0.6%.

As far as earnings surprises are concerned, the Houston, TX-based company has an excellent record, having gone past/met the Zacks Consensus Estimate in each of the last four reports. This is depicted in the graph below:

Halliburton Company Price and EPS Surprise

 

Halliburton Company Price and EPS Surprise

Halliburton Company price-eps-surprise | Halliburton Company Quote

What Does Our Model Say?

The proven Zacks model does not conclusively show that Halliburton is likely to beat estimates in the third quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Halliburton carries a Zacks Rank #3, which increases the predictive power of ESP.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -0.73%. This acts as a spoiler as the combination now leaves surprise prediction inconclusive.

Stocks to Consider

While earnings beat looks uncertain for Halliburton, here are some companies from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Phillips 66 PSX has an Earnings ESP of +6.64% and is Zacks #3 Ranked. The company is anticipated to release earnings on Oct 25. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TechnipFMC FTI has an Earnings ESP of +2.09% and a Zacks Rank #3. The company is anticipated to release earnings on Oct 23.

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