Halliburton Co. CEO Jeff Miller said Tuesday the company is prepared to face the “biggest test” for the U.S. natural gas and oil industry in five years by following the usual playbook and proactively stacking equipment and cutting expenses.
During a conference call to discuss fourth quarter results, Miller said the Houston oilfield services (OFS) giant’s strategy to “sustainably improve our service delivery” would allow the No. 1 pressure pumper in North America to curb margin declines.
There’s little evidence that Lower 48 exploration and production (E&P) companies plan to increase spending this year. However, there’s “clear public evidence of the long-awaited equipment attrition,” which would benefit the market leader.
“This is just the beginning,” Miller said. “We believe a lot more equipment will exit the market as lower demand, increasing service intensity and insufficient returns take their toll…”
The “U.S. shale industry is facing its biggest test since the 2015 downturn,” as both capital discipline and fewer efficiency gains have weighed on activity and production.
“As expected in the fourth quarter, customer activity declined across all basins in North America land, affecting both our drilling and completions businesses.” The U.S. onshore rig count contracted 11% sequentially in the final quarter “and completion stages had the largest drop we have seen in recent history.”
Holidays and weather were the “usual factors,” but business also was impacted as E&Ps remained focused on free cash flow generation commitments and an “oversupplied” natural gas market. As activity continued to slow down in the last half of 2019, Halliburton hunkered down by cutting the workforce and stacking equipment.
“Those actions allowed us to curb margin declines in North America and deliver lower decremental year/year, even though the industry sequential activity drop was much more severe than in the fourth quarter of 2018,” Miller said.
The OFS sector overall now is cannibalizing idle equipment for parts. There also is less horsepower in the Lower 48 market today than some estimates suggest, he said. For example, Halliburton exited 2019 with 22% less available fracturing horsepower than it had at the end of 2018, Miller noted.
Going forward, “we have rationalized our equipment supply to the anticipated level of demand in 2020. The size and scale of our business in North America give us the ability to right size without sacrificing our market leadership position and the value that comes with it.”
During the final three months, Halliburton began implementing a $300 million annualized cost savings and service delivery improvement strategy.
“We moved quickly to execute the initial personnel reductions and real estate rationalization all with an eye to improving on our near-term financial performance,” Miller said. “We achieved about $200 million in savings on a run-rate basis in the fourth quarter. All this impacts our business globally, while the majority of the savings are geared toward North America.”
Halliburton is “looking at 2020 with pragmatism,” he said.
“Early indications are that are U.S. land customers will reduce capital spending approximately 10% from 2019 levels.” The current level of drilled but uncompleted wells, i.e. DUCs, in the onshore “will allow operators to spend less money on new well construction and direct more of it to completions.”
Depressed natural gas prices also are “negatively affecting the activity outlook in the gassy basins, which will likely bear the brunt of the activity reductions in 2020.”
For the first quarter, however, E&Ps have reloaded their budgets and some “modest” completions activity is expected.
“That said, the calendar cadence, where some operators are biased to spend more earlier in the year, will likely remain,” Miller said. This year, Halliburton plans to “provide the capacity that maximizes the returns on our overall fleet. This should also allow us to be efficient about our workforce and maintenance planning, and to achieve higher utilization of existing fleets throughout the year.”
There was considerable pricing pressure during the year-end tendering season, the CEO said.
“Consistent with our capital disciplined approach, we've taken on contracts that are expected to allow our portfolio to earn acceptable returns and decline those that are not. I like the slice of the market that we're choosing to participate in this year. Our high-grade customer portfolio gives us confidence in a more sustainable demand level and a mix of pricing and volume that generate returns for Halliburton.”
The company has no plans to back off in developing technologies. It also plans to boost the “competitiveness” of businesses in North America beyond fracturing to expand its share of wireline/perforating, artificial lift and chemical product lines, which each posted double-digit revenue growth in 2019.
“Despite the overall market softness in U.S. land, we intend to keep this momentum and spread it to other services,” Miller said. “Halliburton is redesigning the way we deliver our fracturing services in order to lower our unit costs and improve margins and returns in the long run.”
This year “brings plenty of opportunities...The oil prices are more constructive as we enter the year. The imminent global recession fears have abated with the help of economic easing from the leading central banks,” while U.S. production growth is slowing because of constricted capital flows.
Oil prices remain supported by production cuts by the Organization of the Petroleum Exporting Countries and allies “ and will fluctuate based on the group's resolve to continue limiting production,” he said. “Gas prices in the U.S. are below break-even levels. U.S. drilling and completions activity may be biased lower due to the consolidation and restricted access to capital.”
Because of its long history in the oil and gas industry, Halliburton “is no stranger to navigating choppy waters. We enter 2020 and our next century with a clear sense of purpose...We expect to grow at or above the market rate this year, consistently focusing on profitable growth and improving our international margins.”
A continued expansion in natural gas activity in the Middle East, along with the “resolution of political issues in Latin America” as well as several pending projects “may enable us to outgrow the market again in 2020,” Miller said.
Last year “closed the decade of the shale revolution that transformed the United States into the world's top hydrocarbon producer. Halliburton was an early participant in this development, and has been investing in it and innovating ever since hand-in-hand with our customers.
“As unconventional enters its maturation phase, Halliburton is committed to the North American market and taking appropriate actions to thrive in the new environment.”
One of the key trends that should define the new decade for the oil and gas industry is digitization, Miller said.
“The next 10 years will see digital technologies and artificial intelligence going mainstream, just like the smartphones did in the last decade. In the oil and gas industry, digitalization unlocks the potential to structurally lower costs, shorten the time to first oil, increase optionality in exploration and production and enhanced performance across the entire value chain.
“Digital is not a separate strategy at Halliburton, rather it is an integral part of our value proposition,” and “digital permeates everything we do.”
Net quarterly losses totaled $1.7 billion (minus $1.88/share), compared with year-ago profits of $664 million (76 cents) and sequential earnings of $295 million net (34 cents/share).
During 4Q2019 Halliburton took a $2.2 billion impairment for its North American business and marketed for sale its pipeline services and well control product lines. The charge was for asset impairments used for fracturing and legacy drilling equipment, as well as workforce reductions. The company cut about 8% of its North American staff by mid-2019 and continued to reduce the workforce to the end of the year.
Excluding the impairments, Halliburton beat on quarterly profit because of strong activity in the international division. North American revenue fell by 30%-plus year/year to $2.33 billion, while international revenue was up more than 10% to $2.86 billion.
Operating loss was $1.7 billion in 4Q2019, reversing from year-ago earnings of $608 million and from $536 million in 3Q2019.
Completion and Production revenue in 4Q2019 was $3.1 billion, a 13% sequential decrease primarily from reduced activity and pricing in “multiple” service lines in North American land mostly associated with stimulation services. Drilling and Evaluation revenue was $2.1 billion, up 4% sequentially, driven by stronger activity in the Middle East/Asia.