Halliburton Co. CEO Jeff Miller said things are looking up for the year, with international activity expanding and U.S. land hydraulic fracturing (fracking) work accelerating on higher commodity prices and “refreshed” customer budgets.

“What a difference 90 days make in this market,” Miller said during a conference call Monday to discuss first quarter results. “Commodity prices have rebounded, customer budgets have refreshed, and we're back to work.”

Specifically in the North American completions business, of which Halliburton is the leader, there was an increase in the stages pumped in 1Q2019, with March “finishing on a high note.” Activity was modestly higher year/year (y/y).

“As, expected we had pricing headwinds throughout the quarter,” Miller said. “However, we believe the worst in the pricing deterioration is now behind us. As we've discussed in the past, the success of our fracking business is not dependent on pricing alone, given our presence in all basins and exposure to all customer groups. We have the ability to pull other levers such as utilization cost savings and operational efficiency to drive a better outcome for our business.”

North American land stimulation services are going to be impacted as customers operate within their budgets. They may see efficiencies in operations but otherwise would reduce drilling activity to remain within cash flow. “On the other hand, I believe that net completions activity will remain essentially flat year-on-year as our customers seek to achieve their publicized production targets.”

North American customer activity into the second quarter “is shaped by the momentum that we saw building at the end of March. As for the next couple of quarters, I think the demand for our services is progressing modestly. The cadence of spend across basins for various companies will look different throughout the year, but Halliburton has the scale, range of services and customer relationships to capture more than anyone else out of every dollar spent in North American land this year.”

Given the demand landscape, the oilfield services (OFS) sector has adjusted and cut its capital expenditures (capex).

More Fracture Capacity? ‘Not Happening’

“Currently new horsepower is not being added to the market,” Miller said. At the same, the “existing equipment is working a lot harder today, leading to equipment attrition. A key driver of this is service intensity, which quickly translates into shorter equipment lives and higher maintenance costs.”

Halliburton today is pushing 30% more sand volumes through its proppant equipment than it did in 2016. “The shift to local sand that is finer and more abrasive,” while customers are drilling longer laterals and fracturing more stages per well. Last year, Halliburton fractured 20% more stages than it did in 2016. 

“With increased efficiency, we've improved utilization, achieving more pumping hours per day,” which again leads to more wear and tear, Miller said.

“Industry sources estimate that about 7.5 million hydraulic hp will need to be rebuilt in 2019 to maintain a flat horsepower supply. This equates to $1.7 billion in equipment spend that I do not see forthcoming as a service companies have cut capital spending plans.”

Capacity attrition is expected to occur “naturally throughout the year...there will be less horsepower available in the market at the end of the year than there is today.” Halliburton plans to “significantly reduce North America fracking capex this year.” There’s no reason to invest in growth at the expense of returns, Miller said.

Capex mostly is to be directed toward improving efficiencies, reducing emissions and refurbishing equipment.

“I’m frequently asked when will we add fracking capacity again,” Miller said. “Let me tell you, I don't see that happening until the market has better supply and demand balance and substantially better pricing.”

Even though the market is slowly rebalancing, “the market conditions are not conducive to adding capacity in this market. We're focused on maintaining the right level of capital spending to support our business but most importantly on continuing to deliver strong cash flow…”

As the North American land market rebalances in the next few quarters, plans are to continue to “control what we can control,” the CEO said. Besides reducing capex, the company is reorganizing its North America land business “to be more nimble and operate more efficiently” whether the market is up or down.

“As expected, fracking activity ramped up in U.S. land, as customers refreshed their budgets.” However, demand for fracturing/proppant services is “evolving” as anticipated, with overall spend likely down 6-10% this year in North America. Schlumberger Ltd. in its 1Q2019 results forecast North American exploration and production investments would decline 10% y/y.

The focus is often on Halliburton’s fracturing business, but it has a portfolio of 14 product service lines operating in North America. For example, the artificial lift and cementing businesses showed strong results in the first quarter, with revenue and margin both higher y/y.

The artificial lift product line grew top line revenues 55% y/y, driven by strong demand for electric submersible pumps which are installed early in the life of the well and soon after they are put on production. Halliburton is also the No. 1 cementing provider in U.S. land, and services continued to be solid in the quarter.

Macro Environment Solid

Regarding the wider market, the macro environment remains favorable overall for the OFS sector. International revenue increased 11% y/y, “a great first step toward our expectation of high-single digit international growth for all of 2019,” Miller said.

Among the technology highlights for the quarter, Halliburton introduced a Motors Center of Excellence, an updated approach to drilling motor development that combines specialized engineering and manufacturing capabilities to customize designs for specific basin challenges.

By establishing a dedicated team of scientists in polymer chemistry, materials, bearing and power section design, Halliburton expects to accelerate research/development activities to deliver leading drilling motors to the industry.

Halliburton also executed an integrated services contract with Royal Dutch Shell plc for post-salt development and pre-salt exploration in Brazil’s Campos and Santos basins. Under the contract, which includes a three-year term with a two-year extension, Halliburton is to provide drilling services to drive efficiencies by integrating multiple product offerings and technologies.

Net profits were $152 million (17 cents/share) in 1Q2019, versus year-ago net income of $46 million (5 cents). Total revenue was $5.7 billion, essentially flat y/y. Reported operating income was $365 million, up 3% y/y.

North America revenue was $3.3 billion, a 7% decrease from 1Q2018, mostly because of lower pricing for stimulation services in U.S. land, partially offset by higher artificial lift, cementing and stimulation services activity.

Latin America revenue jumped 28% y/y to $587 million on higher activity for most of Halliburton's product service lines in Mexico, higher stimulation activity in Argentina and improved fluids activity throughout the region.

Completion and Production revenue was $3.7 billion, down 4% from 1Q2018, while operating income was $368 million, off 26%. The decreases primarily were driven by lower pricing for stimulation services in U.S. land, partially offset by higher artificial lift and cementing activity in U.S. land, increased stimulation activity in Latin America, and higher completion tool sales in Middle East/Asia and Latin America.

Drilling and Evaluation revenue climbed 7% y/y to $2.1 billion, primarily from higher logging and project management activity globally and improved fluids activity in Latin America. Operating income was $123 million, down 35%, resulting primarily from mobilization costs incurred on multiple drilling projects internationally, coupled with reduced project management activity and lower pricing in the Middle East.