Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Halliburton Inc. is no stranger to people thinking it has a friend in the White House. The latest resident never served as the oilfield-services giant's chief, but could really give it a boost in 2017 anyway.

President Donald Trump promised a "very major" border tax to a gathering of executives on Monday morning. It was in keeping with his general desire to strong-arm U.S. corporations into investing at home rather than abroad, although seems at odds with his earlier comments about a border-adjustment tax -- as proposed by House Republicans -- being too complicated.

Taken at face value, though (I know, I know), the border tax would dovetail quite nicely with the message coming out of Halliburton's latest quarterly results, announced the same morning.

The numbers themselves more or less belied this. Halliburton beat the consensus earnings forecast mainly due to stronger profits than expected in its Latin American and Asian operations. Meanwhile, its North American business -- the company's calling card with investors -- appeared relatively sluggish:

Gap Accounting
Halliburton's North American revenue growth is lagging far behind the recovery in the U.S. rig count
Source: Bloomberg
Note: Sequential change.

But look at the operating profit line: Halliburton's North American business swung from a margin of negative 4 percent in the third quarter to a positive 1.6 percent in the fourth. That might not sound mind-blowing. But in the context of a 9 percent increase in revenue, the implied margin on those incremental sales was 65 percent, one of the best showings for that division in years. With Halliburton having characterized the pricing environment for oilfield services in 2016 as a "bar-room brawl," it looks like the company spent the last few months of 2016 focusing on clients prepared to pay up rather than just anyone.

Echoing comments made by rival Schlumberger Ltd. on Friday, Halliburton said it is seeing some recovery in pricing in North America, albeit from a very low base.

HAL to Pay
Halliburton's stock price has nearly doubled in the past year
Source: Bloomberg

Where the tone differed was on the global front. Schlumberger, which is more exposed to international activity, characterized that business as being "like a highly compressed coiled spring." In contrast, even though Halliburton's foreign operations did the heavy lifting in the quarter just gone, its outlook for 2017 in these businesses was pretty subdued.

North America looks more likely to spring this year. Last week saw the biggest increase in rigs drilling for oil in the U.S. in almost three years. Capital raising, employment trends and a jump in M&A activity around the Permian shale basin all point to a continued revival in drilling in the U.S. if oil prices stay above $50 a barrel.

A border tax could supercharge that. As I explained here, a tax system that favored exports over imports could have a profound effect on how oil is priced, leaving domestic grades such as West Texas Intermediate commanding a big premium to international ones such as Brent. At least in the near term -- before it all potentially played havoc with global trade -- U.S. exploration and production companies could enjoy a windfall as their pricing power intensifies versus the domestic refiners buying their crude oil.

Combine that with potentially looser driller constraints, also courtesy of the new administration, and the E&P sector's insatiable desire to plow any windfall back into the ground, and contractors like Halliburton should see their own pricing power ramp up seriously through the year.

Longer term, Schlumberger and Baker Hughes Inc. -- the latter currently in the process of merging with General Electric Co.'s oilfield services arm -- should reap the rewards of their own strategies, which focus on reducing the high costs of drilling in deep water and other challenging areas.

For now, though, America is where it's at -- especially when you also look at Halliburton's valuation.

Round Third
Halliburton trails both of its major peers in terms of Ebitda multiples
Source: Bloomberg
Note: Enterprise value as a multiple of consensus, one-year-forward Ebitda forecasts.

 

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net