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Halliburton Doubling U.S. Frack Capacity, Hiring 2,000, Warns on Rising Costs

Halliburton Co. is bringing back double the U.S. pressure pumping capacity it had expected to reactivate for the entire year and is hiring people as quickly as possible, as customer animal spirits "run hard," CEO Dave Lesar said Friday.

In a domestic market rapidly short fracture (frack) sand, equipment and experienced personnel, the No. 1 North American pressure pumper is adding 2,000 people to the payroll and putting idled equipment back to work at a frenetic pace, Lesar said during a conference call to provide an update on operations.

"Based on current customer demand, we are deploying nearly double the pressure pumping equipment than we originally anticipated reactivating for the entire year and we are bringing that reactivated equipment out in the first six months of the year, instead of over the course of the year," he said.

Coming off a historic trough, "what we have to add back is almost unprecedented." Since the downturn began in late 2014, Halliburton had stacked horsepower and hardware, and it had culled its global workforce by 35,000 people, ending 2016 at about 50,000 worldwide.

The rapid restart has repercussions and is expected to dent 1Q2017 performance because of the higher costs. The plan now is to front load costs as much as possible to improve margins through the second half.

Halliburton's customer base, Lesar said, now has separated itself into three main groups, "those looking to grow production by outspending cash flow, those looking to improve returns by living inside their cash flow, and finally, those companies that are proving up reserves and preparing themselves for sale...This diverse and exciting market has created a surge of activity and supports my thesis that the animal spirits are back in U.S. land. And today they are continuing to run hard."

With the historic downturn in the rear-view mirror, "we find ourselves speeding along with the rapid land rig count growth." U.S. land has added more than 267 rigs since the beginning of 4Q2016, "which is nearly two rigs per day...In the first quarter alone, we have seen 25% sequential growth in U.S. land rig count."

The company now is forecasting U.S. land revenue growth will be up 25% sequentially in the first quarter.

"Bottom line is, I love the market outlook for U.S. unconventionals, particularly as it has become the global swing producer, and that is a position that operators will likely not want to give up," the CEO said. "So, of course, we don't want to give up our market share there either. This explosive growth is providing us with a unique set of opportunities today."

During the final three months of 2016, Halliburton traded some of its huge market share to improve margins. As it entered 2017, management maintained the option of continuing with that approach or fighting to maintain its hold in U.S. land. And as the rig count escalated, "we pivoted to the option of preserving market share," Lesar said.

During the 4Q2016 conference call two months ago, Lesar had said the cost associated with equipment reactivation would average around 1 cent/share per spread. He hinted that costs could be higher.

"By doubling this rate of activation and accelerating it to the front half of the year, we are in effect front loading much of the hit to income to the beginning of the year. But I believe that was the smart thing to do for the future profitability profile we will have from getting this equipment deployed earlier."

In addition to reactivating fracking equipment, it also is bringing back other stacked land-based equipment, particularly from the cementing business, "where we are adding nearly 30% more equipment to meet increased demand in the first half of the year," Lesar said. "This, of course, will also temporarily increase our cost."

Traditionally, Halliburton has enjoyed a head start to move pricing with customers at a pace that both preceded and offset the impact of rising supply chain costs.

"However, with a dramatic shift in activity from such a deep drop, our suppliers are just as eager to raise prices where tightness exists, and believe me, they are trying to do it," he said.

Besides equipment and personnel, Lesar said Halliburton's largest source of cost inflation is sand, a business that has seen a sharp uptick as producers increase their frack stages and proppant loads.

"While contracted sand currently meets approximately 60% of our needs, historically high demand has made us turn to the spot market more than anticipated at the start of the year. We have found ourselves as an industry in a short-term situation that is tighter than we would like, because there are not adequate winter stockpiles for the level of activity growth we've seen this quarter.

"Today, some grades on the spot market are closed to a double that of contracted pricing. This has hit us by approximately $50 million in inflationary cost in the first quarter. I believe this will correct itself, because the adequate sand volumes exist and pricing will ultimately abate as spring arrives, mining begins and new capacity comes online."

Besides sand, Halliburton is managing rising costs around third-party trucking and labor. "The trucking industry grows and shrinks with the cycle, and with increasing activity in sand volumes, the current supply of trucks is not yet adequate across all basins, that as always happens, supply will eventually rise to meet demand..."

North American margins should accelerate toward the end of the year.

"In my view, nothing has fundamentally changed in our North America business that would preclude us from achieving the margins and returns our investors have come to expect. I also believe that capturing and holding market share was way more important than the cost impact of the decisions we made during the quarter. We are protecting what we built during the downturn..."

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