Major oilfield services provider Halliburton Company (HAL) has cautioned investors that a higher-than-expected spike in the costs for guar gum – a key constituent of the company’s market leading ‘hydraulic fracturing’ procedure – will adversely impact its second quarter results.
Guar gum, a bean grown mostly in India, apart from being a dairy products thickener is also a main ingredient of the hydraulic fracturing (or fracking) process, which is used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals.
As per Halliburton, demand for guar gum has gone through the roof in North America following the growing use of hydraulic fracturing in the extraction of oil and natural gas liquids from shale. This has led to concerns about the commodity’s potential shortage later in 2012, thereby driving up guar gum prices more rapidly than previously thought.
The rising costs, according to the Houston-based company, have affected its second quarter profitability in North America more than expected. Halliburton now sees margins in the region to be down by 300 basis points more than the previous forecast of a 200–250 basis points squeeze, implying 500–550 points drop from the first-quarter levels.
However, the world's second-largest oilfield services company after Schlumberger Ltd. (SLB) maintains that the increased guar gum costs are ‘temporary in nature, only until new supplies arrive in early 2013.' In the meantime, Halliburton is looking to lessen the impact of this price rise in the second half of the year by passing along the burden to the customers and increasing the usage of guar alternatives in the fracking process.
Second Quarter Estimate
Halliburton plans to release its quarterly results on Monday, July 23, 2012, before the start of trading. The Zacks Consensus Estimate for Halliburton’s second quarter is 84 cents per share, higher than the earnings of 81 cents in the year-ago period but below the 89 cents earned in the previous quarter.
Rating & Recommendation
Halliburton is currently a Zacks #3 Rank (Hold) stock, implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months. We are also maintaining our long-term Neutral recommendation on the stock.
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