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Halliburton Cuts 1Q Outlook on Equipment Oversupply in North America

The No. 1 completions expert in North America, Halliburton Co., said pricing pressure is likely to continue through the first quarter because of an overabundance of onshore fracturing equipment following the sharp decline in oil prices late last year.

During a conference call on Tuesday to discuss quarterly and 2018 results, CEO Jeff Miller said reloaded capital expenditure (capex) budgets mean exploration and production (E&P) companies are going back to work. However, the pace is slow, with less spending than anticipated.

“We intend to dynamically respond to the changing market environment, reduce capital spending, develop differentiating technologies and generate strong cash flow,” he told investors.
Maintaining capital discipline was a recurring theme during the hour-long conference call.

Miller parlayed conversations with E&P customers, noting that the oil majors are likely to “stay the course on their budget plans, and as many of them recently shifted their investment priorities” from the offshore to shorter-cycle North America onshore plays.

The large independents, which last year began budgeting for $50/bbl West Texas Intermediate (WTI), means “their spending should be mostly flat in 2019,” Miller said. But for the smaller-to-mid cap E&Ps, with limited access to capital, 2019 expenditures may be cut “most aggressively.” Still, the small operators also are “the most flexible on budget expansion, if the market is supportive later in the year.”

In the near term, however, the call for North American completions and production (C&P) services is down as the WTI pricing downturn in 4Q2018 “created excess equipment capacity in the market and had a detrimental effect on services pricing.”

First quarter revenue in turn is forecast to fall sequentially.

Newly appointed CFO Lance Loeffler, formerly the investor relations chief, said sequential revenue in the C&P division is forecast to decline “mid-to-high single-digits with margins decreasing 300-400 basis points. For our drilling and evaluation division, we anticipate sequential revenue will experience a decline in the mid-to-high single-digits, largely in-line with prior-year declines, with our margins declining by 100-150 basis points.”

Beyond the first quarter, prospects look better for Houston-based Halliburton, which is celebrating its centennial this year, Miller noted.

 A higher-than-ever level of drilled but uncompleted (DUC) wells across North America offers a “future revenue opportunity,” and in the second half of the year, takeaway capacity constraints in the Permian Basin should start to improve as pipelines come online.

“That means many customers should go back to work during the second quarter to get production ready for the new pipelines,” Miller said.

Increased oil price volatility has created “near-term headwinds as we enter 2019,” but “demand fundamentals for multi-year industry growth are still intact. While short-term oil and gas demand changes are hard to call with precision, we know that the need for energy is consistently growing.”

North America is now the world's top oil producer, which means it “exerts considerable influence on commodity pricing. Second, the industry has cut a lot of costs out of the system and introduced significant efficiencies. And last, but certainly not least, 2018 was a year of transition to a more disciplined free cash flow approach by many customers in the North American E&P industry.”

Miller also spent a few minutes discussing some of Halliburton’s latest technology offerings, which are the lifeblood for the OFS sector. Last year the company received nearly 900 patents, a 10% increase year/year.

“It is critical to understand how we prioritize technology investment,” he said. “Over the last few years, technology has driven substantial operational and surface efficiencies in North American shale. I believe the future of unconventional technology will be more heavily weighted toward enabling higher well productivity.”

Last year Halliburton introduced the Prodigi AB intelligent fracturing service, which now has been deployed across the U.S. land segment. The service is designed to improve automation and “consistent cluster performance,” in fracture stages, with less wear-and-tear on equipment.

“It has been used on more than 1,450 stages for 20 different customers across the country, from the Eagle Ford Shale in South Texas to the Bakken formation in North Dakota,” Miller said.

“Strong customer interest and willingness to pay a premium for this service support my point about the growing importance of technology that improves well productivity and unconventionals.”

Another technology into which Halliburton is pouring capital this year is directional drilling, which assists with longer lateral lengths in the U.S. onshore. The iCruise rotary steerable system, launched in September, is designed to cut operating costs and reduce maintenance time.

“In 2019, we will focus on rolling out the iCruise system in the international markets. In fact, we already had test runs for several customers in the Middle East and delivered the longest lateral and longest well” in Argentina's Vaca Muerta formation in the first deployment, Miller said.

“Today, we estimate that 40% of the wells around the world are either shut in or producing below their potential due to well integrity issues costing our customers billions of dollars in lost production.”

The company’s wireline tools for well integrity assessment, for example, enable E&Ps to understand the conditions and treat the problems of mature wells. The artificial lift portfolio also has been expanded with the acquisition in 2017 of Tulsa-based Summit ESP, an electric submersible pump specialist.

Net income in the fourth quarter was $668 million (76 cents/share) versus a year-ago loss of $825 million (minus 94 cents) and from $435 million (50 cents) in 3Q2018. Revenue was nearly flat year/year at $5.9 billion, but it was down sequentially by 4%. Operating income of $608 million climbed from $383 million a year ago, but it was off 15% from the third quarter.

For 2018, Halliburton earned $1.66 billion ($1.89/share), versus a 2017 loss of $468 million (minus 51 cents).

North America revenue fell slightly year/year to $3.3 billion but it was off 11% from the third quarter on lower activity and pricing, which was partially offset by higher fluids activity in the Gulf of Mexico.

Latin America revenue climbed year/year to $607 million from $615 million, and it was up 16% sequentially on software and completion tool sales, as well as increased stimulation activity across the region, coupled with improved activity across multiple product service lines in Mexico.

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