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Halliburton (HAL) Q3 Earnings: Permian Constraints a Worry

Nilanjan Choudhury
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Halliburton (HAL) Q3 Earnings: Permian Constraints a Worry

Pipeline takeaway capacity constraints in the Permian Basin seems to be the primary reason for apprehension about Halliburton's (HAL) Q3 results.

Halliburton Company HAL is expected to release third-quarter 2018 results before the opening bell on Monday, Oct 22. The current Zacks Consensus Estimate for the quarter under review is a profit of 50 cents on revenues of $6,130 million.

In the preceding three-month period, the major oilfield service provider missed the consensus mark by 1.7% due to reduced pressure pumping services in the Middle East, decreases in completion tool sales in Europe/Africa/CIS and decline in Gulf of Mexico drilling activity.

As far as earnings surprises are concerned, the Houston, TX-based company is on a firm footing, having gone past/met the Zacks Consensus Estimate thrice in 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 Quote

Investors are keeping their fingers crossed and hoping that the provider of technical products and services to drillers of oil and gas wells can get back to winning ways by surpassing earnings estimate this time around. However, our model indicates that world's second-largest oilfield services company after Schlumberger SLB might not beat on earnings in the third quarter.

Let’s delve deeper and find out the factors impacting the results.

Factors to Consider This Quarter

Pipeline takeaway capacity constraints in the Permian Basin seems to be the primary reason for apprehension about Halliburton’s prospects. Though the company’s all-important North America business remains robust on the back of crude pricing strength, investors were spooked after the company warned that a slowdown in the oil and gas rich-Permian Basin activity due to pipeline bottleneck will be a drag on third quarter earnings.

As a proof of the market challenges, the Zacks Consensus Estimate for third-quarter Completion and Production adjusted operating income is pegged at $641 million, lower than $669 million reported in the previous quarter. To put things in perspective, the Completion and Production unit makes up around three-fourths of the oilfield service provider’s total operating income.

Another reason for stymied estimates for Halliburton is perhaps pricing pressure in the international market, which is likely to continue for some time. Most of these long lead-time projects require lengthy contracts with oil and gas upstream players and therefore a short-term commodity price rise is not translated into higher spending immediately.

What Does Our Model Say?

Our proven model too does not conclusively show that Halliburton will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, for Halliburton stands at -1.80%. This is because the Most Accurate Estimate stands at 49 cents, while the Zacks Consensus Estimate is pegged higher, at 50 cents.

Zacks Rank: Halliburton’s Zacks Rank #5 (Strong Sell) further decreases the predictive power of ESP, making us less confident of an earnings surprise call. 

As it is, we caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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:

CNX Resources Corporation CNX has an Earnings ESP of +43.29% and a Zacks Rank #2. The company is anticipated to release earnings on Oct 30. You can see the complete list of today’s Zacks #1 Rank stocks here.

Concho Resources Inc. CXO has an Earnings ESP of +6.70% and a Zacks Rank #2. The company is likely to release earnings on Oct 30.

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CNX Resources Corporation. (CNX) : Free Stock Analysis Report
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