Halliburton Co. (HAL), the world’s largest provider of hydraulic-fracturing services, said North American profit margins this quarter will shrink more than previously forecast because of higher material costs.
A potential shortage of guar gum, an agricultural commodity used to blend materials used in hydraulic fracturing, has driven up prices more than expected, Houston-based Halliburton said today in a statement.
Halliburton said second-quarter North American margins will be 5 to 5.5 percentage points lower than in the first quarter, compared with a previous forecast of a 2 to 2.5 percentage point reduction. Halliburton has cited rising guar costs as a reason to seek higher fees from energy producers. The guar-gel system can be more than 30 percent of the total price to frack a well, the company said in April.
“The general belief was that Halliburton was more insulated based on early purchasing and inventory of guar supply,” said Scott Gruber, a New York-based analyst for Sanford C. Bernstein & Co. “This announcement runs counter to that.”
Halliburton will earn 77 cents a share this quarter, 7 cents less than estimated, based on today’s forecast, Gruber said today in a telephone interview. He rates the shares “market perform” and owns none.
Gruber had expected Halliburton to earn 84 cents a share in the second quarter. That also is the average of 28 analysts’ estimates complied by Bloomberg.
Quest for Guar
“The magnitude is actually more than we anticipated,” said Brian Uhlmer, an analyst at Global Hunter Securities LLC in Houston who said he had expected the reduction to be about 1 to 1.5 percentage points more than previously disclosed.
The operating margin in North America in the first quarter climbed to about 25.5 percent from 24.5 percent a year earlier.
Guar is made into a thickening gel used to carry sand down a well and into the cracks created from hydraulic fracturing. Sand, which is used to keep fractures propped open so oil and natural gas can flow out, travels further into the crack with guar than with thinner fluids.
Guar has been used to increase the viscosity of liquids in foods including ice cream and fruit drinks as well as consumer products such as shampoo and hand lotion.
Halliburton said today it thinks the higher costs are “transitory” until more supplies are available early next year. The company said it’s seeking “relief” from customers and to use more synthetic and other guar alternatives.
Uhlmer, who has a buy rating on Halliburton shares and doesn’t own any, said new contracts may include higher prices as they are negotiated.
“Everybody’s struggling for guar,” Halliburton Chief Financial Officer Mark McCollum said at a May 22 investor conference. “We’re aware that there are some of our primary competitors missing jobs because of the unavailability of guar.”
Halliburton fell 3.5 percent to $28.10 at the close in New York. The stock has dropped 19 percent this year.
The stock has declined amid concern about the level of work in North America, said Global Hunter’s Uhlmer.
“A shortage of guar means that activity is still remaining high and people are still out there working,” he said.
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