Demand for onshore pressure pumping services has all but evaporated, but conditions may deteriorate further by late November into the first quarter of 2016, Halliburton Co. CEO Dave Lesar said Monday. The fourth quarter average horizontal rig count could drop about 15-20% sequentially, the acting CFO warned.
The No. 2 oilfield services operator and No. 1 hydraulic fracturing company offered no better news than Schlumberger Ltd. did last Friday (see Shale Daily, Oct. 16). Halliburton fired 2,000 more people in the last month, with its workforce now 21% smaller (less 18,000) than at the start of the year, as the worst market decline in decades sucks all the air out of the oilfields.
The worst isn't over, Lesar said during a conference call to discuss third quarter results.
“In my 22 years in this business, I've never seen a market where we've had less near-term visibility,” he said. “In reality, we are managing this business on a near real-time basis, customer-by-customer, district-by-district, product line-by-product line, and, yes, even crew-by-crew...
“Our view is that the first quarter could end up being a mirror image of the fourth quarter. So, just as the fourth quarter is facing a speed drop-off post Thanksgiving, we expect to see a slow ramp up beginning in January, and improving from there, suggesting that the first quarter could be the bottom of this cycle.”
Lesar said full-year 2016 is going to be a “similar mirror image” of 2015, “directionally a slow start and then perhaps picking up speed in the second half of the year.”
He wasn’t confident enough to call the exact shape of the recovery. “But we do expect that the longer it takes, the sharper it will be. Until then, we will continue to execute on our strategy, and we will be watching the same external data points that you do, what is happening to oil production? What is the rig count doing? What is happening with operators' cash flows, and how are re-determinations impacting our customers' credit lines? In addition, we have our own proprietary internal metrics that we will follow.”
Halliburton plans to adjust its cost structure to market conditions, “but to me, it does not make sense to reduce costs or infrastructure to reflect expected fourth quarter's reduced activity levels. Instead, we are positioning our North America land business for future success, and to ultimately outperform the industry as the market recovers.”
North American pricing continued to erode during the third quarter, impacting the total services industry profitability, Lesar said. Pricing has become "unsustainable," and fourth quarter visibility "is murky at best."
Based on conversations with customers, "most operators have exhausted their 2015 budgets and are taking extended breaks starting as early as Thanksgiving...Activity could drop substantially in the last five weeks of the year."
The prospects of reduced borrowing capacity for operators in North America, combined with a prolonged holiday season, "make the fourth quarter challenging and difficult to predict," acting CFO Christian Garcia said. "So far, the average horizontal rig count is down a little less than 10% from the third quarter average. If these headwinds play out, we estimate that the fourth quarter average horizontal rig count could drop about 15% to 20% sequentially. We expect our North America revenues and margins to decline, but we anticipate sequential decrementals to be only in the mid-teens due to our cost reduction efforts."
The North American "pumping business...is clearly the most stressed segment of the market today, but it’s also the market we know the best," President Jeff Miller told analysts. "This is the segment that we expect to rebound the most sharply."
Fracturing represents about 70% of the cost of a U.S. well. "That's naturally where customers have gone in terms of the pressure to reduce costs," Lesar said.
Halliburton is operating almost at breakeven in North America, with an operating profit margin of 0.8% in 3Q2015. Schlumberger in comparison reported a margin of 8.9% for 3Q2015. Unlike Schlumberger, Halliburton hasn't reduced its infrastructure as much because it's merging with Baker Hughes Inc. and wants to be ready for the extra work once the estimated $34.6 billion deal is completed (see Daily GPI, Sept. 28). Baker is to deliver its quarterlies on Wednesday.
Halliburton reported a net loss in 3Q2015 of $53 million (minus 6 cents/share), versus year-ago profits of $1.39 billion ($1.41). Revenue plunged to $5.58 billion from $8.71 billion and it was down 7% sequentially. Operating income declined to $43 million from $1.63 billion. Cash flow from operating activities came in at a loss of $641 million net, versus cash flow in the year-ago quarter of $2.60 billion.
North American revenue plunged to $2.49 billion from $4.72 billion year/year, with completion/production revenue at $1.89 billion from $3.70 billion and drilling/evaluation at $590 million from $1.019 billion. North American operating income was $8 million, versus $906 million a year earlier.
Primarily because of the downturn in the energy market and its corresponding impact on the business outlook, Halliburton recorded company-wide charges related to asset write-offs and severance costs of $257 million after-tax (30 cents/share) in 3Q2015. Baker Hughes acquisition-related costs were $62 million (7 cents/share) in the quarter.
"This is a challenging market, but our strategy remains the same," Miller said. "We are looking through this cycle to ensure that we are positioned to accelerate our growth when the industry recovers, and we are managing through the downturn by drawing upon our management's deep experience in navigating through past cycles."