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Things You Should Know from Halliburton's (HAL) Q4 Earnings

Nilanjan Choudhury

Heading into the fourth quarter, expectations for Halliburton's HAL earnings were rather uncertain. The company, which is active in all unconventional basins in the U.S., operates in two segments: Completion and Production, and Drilling and Evaluation.

The last three-month period of 2019 was going to be tough for the company with North American oil rig count dropping by 33 from the third quarter, as reported by Baker Hughes BKR in its highly followed weekly publication. Halliburton, with sizable presence in the region, was always going to suffer.

However, the company did manage to beat the Zacks Consensus Estimate as robust international activity more than offset headwinds in North America. The world's second-largest oilfield services company after Schlumberger SLB reported an adjusted profit of $285 million or 32 cents per share from October to December, surpassing the Zacks Consensus Estimate of 29 cents.

While the numbers don’t fully explainthe stock's lackluster performance (edging down 0.8% to $23.77 by the close of trading on Tuesday) following its earnings release, we take a closer look at the results to gain further insight. Here are certain key things you need to know from Halliburton's earnings update.

Inside the Numbers

Massive One-Time Charge: Including one-time items, Halliburton actually lost $1.88 per share. The company, with a market capitalization of $21 billion, took a $2.2 billion hit from non-cash impairment charges associated with pressure pumping and legacy drilling equipment.

North American Woes: Revenues fell $745 million (or 12.6%) to $5.2 billion from $5.9 billion in the fourth quarter of 2018. In particular, revenues from North America dropped by 30.2% year over year, which highlights depressed activity in this influential region. This meant that bottom line was 22% lower than the year-ago figure of 41 cents.  

International Operations to the Rescue: On the other hand, sales from international operations climbed 10.1% from the year-ago period to $2.9 billion, an area that continues to exhibit growth momentum, especially in Middle East/Asia.

Operating Margin Improves: Halliburton’s adjusted operating income was down 10.2% to $546 million, indicating softness in activity and pricing. However, operational efficiency and cost management allowed the company to better its profit margins by 300 basis points.

Solid Balance Sheet: The company had about $2.3 billion in cash on the books and was able to restrict its long-term debt load at the year-ago level of $10.3 billion.

Lower Free Cash Flows: Free cash flow was down, falling to $915 million in 2019 from $1.1 billion in 2018. Despite the free cash flow decline, management bought back about $100 million of its shares, and its quarterly dividend remained unchanged.

Above-Average Dividend Yield: Halliburton today pays shareholders 18 cents per share quarterly dividend (72 cents per share annually) for a total dividend yield of 3%, which is higher than the industry’s 1.9%.

What Lies Ahead?

Oil Price Prediction for 2020: Oil posted 34.5% rise last year -- the biggest annual increase since 2016. In particular, WTI, the U.S. benchmark, jumped nearly 11% in December, aided by the agreement on a phase one trade deal between U.S. and China and the OPEC+ group’s output cut announcement. However, the improving oil market notwithstanding, WTI crude averaged $56.74 in 2019, around $8-a-barrel lower than the 2018 average of $65.06.

As usual, there are too many variables to make an educated guess as to the price of oil going forward. A clutch of industry observers sees depressed prices this year, including the EIA that expects an average price of $59.50 a barrel for 2020.   

Company Outlook: Well aware of the tough operating environment, Halliburton aims to protect its cash flows. The company has pledged to spend $1.2 billion in 2020 as capital expenditure, down from $1.5 billion in 2019.

Halliburton generated approximately $2.4 billion in operating cash flow last year, compared to $3.2 billion in 2018. Therefore, even a 50% drop in operating cash flows in 2020 would come to $1.2 billion, enough to cover capital spending  

Moving onto the next quarter, Halliburton expects narrowing sequential profitability for both its segments. For the Completion and Production unit – which makes up around 59% of the oilfield service provider’s total revenues and 63% of its operating income – the company projects margin decline of 1.25-1.5%. The Drilling and Evaluation margins could drop by 2-2.5%. Clearly, Halliburton sees enough headwinds over the next few months.

Net interest expense for the fourth quarter of 2019 was $141 million, and the company expects the same amount for the first quarter of 2020.

Zacks Rank & Stock Picks

Halliburton currently carries a Zacks Rank #3 (Hold). Meanwhile, investors interested in the oilfield service space could look at a better option like Oceaneering International, Inc. OII that carry a Zacks Rank #2 (Buy). The 2020 Zacks Consensus Estimate for this Houston, TX-based company represents 70.5% earnings per share growth over 2019.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Baker Hughes Company (BKR) : Free Stock Analysis Report
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