Domestic Bliss

America Makes Halliburton Great Again

The domestic shale recovery continues, despite promises of E&P discipline.
HALLIBURTON CO
+0.61
At Closing, February 16th
47.50 USD
SCHLUMBERGER LTD
+0.07
At Closing, February 16th
66.28 USD

Halliburton Co. agrees with arch-rival Schlumberger Ltd. on this much: North America is intense.

Halliburton's home region accounts for almost 60 percent of its revenue, versus around a third for Schlumberger. The latter, which reported results on Friday, has undergone a change of heart in the past three months or so, shifting from a cautious outlook for North America to going all-in, including a surprise acquisition there.

Home Advantage

North America dominates Halliburton's business mix

Source: Bloomberg, the company

Halliburton, meanwhile, has been banging the drum about the recovery in the shale patch for a year; last March, the company issued an oddly bullish profit warning as it raised spending on new capacity to meet anticipated demand. On Monday morning's call to announce its own results, Halliburton was unequivocal about the pace of activity in U.S. drilling and fracking.

In particular, CEO Jeff Miller addressed one of the big questions in the market; namely, would the exploration and production sector's professed desire to be more disciplined affect spending? While he acknowledged there were two sets of E&P companies today -- one group focused on generating more cash, the other less so -- his take is:

Both sets of companies are going to be working and busy in '18, and I suspect busier than they were in '17.

He's talking his book, of course. But Schlumberger, the International Energy Agency and even OPEC are all saying pretty much the same thing.

Halliburton says it is essentially sold out in terms of its fracking fleet in a market that is short of supply. The obvious conclusion to draw is that Halliburton should be building new capacity to take advantage. While nothing definitive was said on this front on Monday morning, shortages and the stress on existing equipment due to intense use were consistent themes, and Miller made a point of noting the company has "less equipment in the field than we did at our peak in 2014." Plus, Halliburton's capital expenditure suggests some dollars are going into new fracking capacity:

The Spend Trend

Halliburton's capex jumped in the fourth quarter to more than double where it was a year earlier, taking it to the highest level since mid-2015

Source: Bloomberg

While margins eased slightly in the completion and production division -- the product segment housing Halliburton's pressure-pumping business and which accounts for 63 percent of revenue -- that is likely a blip in a continuing upward trend. Halliburton should be spending into growth and expanding margins this year:

Welling Up

Operating margins in Halliburton's completions business took a breather in the fourth quarter but are still far above where they were a year before

Source: Bloomberg, the company

It's on the international front that things turn a bit colder. Like Schlumberger, Halliburton had to write off assets in Venezuela as that economy has tilted into a nose dive. Equally, though, Halliburton did sound an optimistic note about "green shoots" appearing in international E&P spending. Indeed, overall, its smaller foreign businesses collectively outgrew North America in the latest quarter:

Foreign Aid

Revenue from Halliburton's international business actually increased faster than for North America in the fourth quarter

Source: Bloomberg, the company

Note: Revenue growth, quarter over quarter.

Even so, Miller warned everyone on Monday's call not to mistake those green shoots for money trees:

When I described green shoots, I'm talking about activity.But that activity is spread thinly. A lot of capital available in the marketplace, and because activity is spread thinly, it doesn't create the kind of tightness for a price inflection ... My tone has changed and I see price inflection. But I don't think it's until later 2018. And certainly we'll see it in 2019.

Halliburton knows optimism around North America offsets such caution on the international scene. This doesn't work quite as well for Schlumberger.

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

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