Halliburton Ready to Sacrifice Market Share to Boost Profit

  • Posts surprise third-quarter profit vs. expected 6-cent loss
  • North American sales grew for first time since oil crash

After boosting North American sales for the first time during the downturn, Halliburton Co. is determined to raise prices for its services to lock in profits in the world’s largest fracking market.

Dave Lesar, chief executive officer for the biggest fracking provider, said he’s even ready to give up market share to cheaper rivals if that’s what it takes to return to a solid record of profitability. The company surprised investors by posting a penny-a-share third-quarter profit Wednesday, due in part to two-years of brutal cost-cutting during the downturn. Halliburton also benefited from an increase in oilfield drilling as crude prices strengthened from February lows and customers went back to work.

"I never thought I would be so satisfied by barely making a profit," Lesar told analysts and investors Wednesday on a conference call to discuss the earnings. "Our customers’ animal spirits remain alive and well in North America, even though for some, they may feel caged in a bit by cash flow constraints in the short term."

Shares rose 4.3 percent to $49.07 at the close in New York, after earlier climbing as much as 6.7 percent, the biggest intraday gain since August 2015.

Surprise Profit

The Houston-based company that helps oil explorers drill and complete wells eked out net income of $6 million, or 1 cent a share,  according to a statement Wednesday. Investors had been braced for another loss comparable to the $54 million, or 6-cent, loss Halliburton posted a year earlier.

"In the U.S., we believe we now have the highest market share we’ve ever had," Lesar said. "At this point, if we have to give some of it back to move margins up, we might take that approach."

Oilfield service prices are expected to improve next year, the company said Wednesday, putting within reach an operating profit margin not seen in more than four years.

"We’re definitely going to need some price to get back toward the historic margins that we’ve had in the past," Chief Financial Officer Mark McCollum said on the investor call. "We’re going to be pushing as hard as we can to get back to 20 percent as quick as we can."

Business Growth

Halliburton sales in the U.S. and Canada had plunged by more than two-thirds during the downturn as customers slashed spending to survive a global oil rout brought on by a glut of new production. Executives at Halliburton and its largest competitor, Schlumberger Ltd., declared at the end of July that the worst may be over after oil prices bounced off their low in February and the U.S. land rig count hit bottom in May.

"There’s definitely light at the end of the tunnel as it relates to North America onshore activity," said Byron Pope, an analyst at Tudor Pickering Holt & Co. in Houston, who rates the shares a buy and owns none. "Now it’s just a question of what’s the timing and the magnitude of the recovery."

Lesar credited the surprise third-quarter profit in part to "relentlessly managing costs" as the company took advantage of an uptick in drilling in U.S. shale fields, according to Wednesday’s statement. Explorers boosted the U.S. onshore rig count by 100, or 25 percent, during the third quarter, according to Baker Hughes Inc. 

‘Barroom Brawl’

Most of the oil-services sector this year has been operating at a loss in North America. Halliburton still isn’t expected to report a profit in North American operations until the first quarter next year, Pope said.

The amount of hydraulic-fracturing equipment active in the U.S. stands at 7 million horsepower throughout the industry, Jeff Miller, president of Halliburton, said on the call. With about 70 percent of the industry fleet being used, more will have to go back to work in order for service companies to have pricing power.

While the world’s contractors have begun trying to boost service pricing as activity climbs, Miller has lately characterized negotiations with customers as a "barroom brawl." The pricing battle was on display at this week’s Oil & Money conference in London, where BP Plc CEO Bob Dudley said he’s aiming to get 75 percent of the cost reductions producers won during the downturn to "stick."

Oil Explorers will continue to be conservative in their spending as they plan for oil prices to stay below $60 a barrel for the foreseeable future, making many higher-cost projects uneconomic. Dudley said BP is unlikely to invest in new deepwater frontier exploration.

Lesar said Wednesday Halliburton will have to strike a balance between providing the service its customers need, while raising prices enough to generate profits for its own shareholders.

"It’s going to be a give and take," he said on the investor call.

Profit Margins

Halliburton last reported an operating profit margin of 20 percent for North America in the second quarter of 2012, said Andrew Cosgrove, an analyst at Bloomberg Intelligence. The company’s margins in the region were once as high as 29 percent a year before that, he said. For the third quarter 2016, Halliburton’s margin of operating loss was 4.1 percent.

Shares rose 1.7 percent to $47.89 at 8:57 a.m. in premarket trading in New York. West Texas Intermediate, the U.S. benchmark for crude, slipped 0.2 percent in the quarter to average about $45 a barrel.

The margin of operating loss in North America improved more than expected, Angie Sedita, an analyst at UBS Investment Research, wrote Wednesday in a note to investors.

"Total revenues were 1% below our forecasts, however, impressive cost controls across all regions led to higher margins across the board with operating income 65% above our forecasts," Sedita wrote. "We view the results as a modest positive for the stock."

Schlumberger is scheduled to report third-quarter results on Thursday.

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