Halliburton Co., the No. 1 fracture specialist in North America, expects to see “progressive improvement” into the new year as the market tightens from more well completions and less drilling in the Lower 48.
Regarding the outlook, “2021 feels better from here,” CEO Jeff Miller said during a conference call early Monday to discuss third quarter performance. With the second half of 2020 considered “the bottom, we see progressive improvement in 2021.”
Still, don’t expect the coming year to be a whiz bang turnaround, Miller warned.
“2021 will be slightly down from 2020 in terms of overall growth,” he said, with a stronger second half. From there on, “I think it feels better from there and we see sequential recovery.”
The mighty North America has been transformed into a “leaner, more profitable” unit, with a “focus on profit, not share,” Miller said. “We now have 50% less structural headcount and a 50% smaller real estate footprint in North America compared to last year. These and other changes to how we’re organized and how we execute every day are sustainable and independent of market activity levels…”
Demand recovery is beginning to unfold, the CEO said. “However, the pace and magnitude of recovery going forward will vary greatly by geography and customer type, with resurgence of Covid-19 in certain economies presenting near term risks.
Miller’s remarks echoed those by Schlumberger Ltd. CEO Olivier Le Peuch during the quarterly call last Friday.
Halliburton during the second quarter joined the entire energy complex in taking drastic action as the pandemic slammed oil and gas demand. The Houston giant cut capital expenditures by half from 2019 to $800 million. Annualized overhead was slashed by roughly $1 billion by cutting jobs, consolidating facilities and removing a layer of operations management in North America. Salaries for the executive team also were reduced.
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‘Fundamentally Different Course’
Today, “Halliburton is charting a fundamentally different course,” Miller said. “We will continue to take strategic actions designed to boost our earnings power and free cash flow generation both today and as we power into the eventual recovery.”
North America, once the bread-and-butter business, continues to underperform the international segment. For the second quarter in a row, nearly two-thirds of the total revenue was from international business.
Still the leading completions oilfield services (OFS) operator in North America, Halliburton has “exposure to every basin and every customer group,” Miller noted. “The month-on-month land completions activity improvement in the third quarter was a welcome sign.
“But September stage counts were still below April activity levels, and overall stages completed in U.S. land showed a modest sequential increase for the full quarter. We intend to stay disciplined in how we deploy our fracturing fleets into the recovering market.”
North America land completions activity to the end of this year is expected to increase as operators deplete their drilled but uncompleted (DUC) wells, Miller said. The rig count should lag completions and “not step up materially before year-end.”
Miller was asked about the spate of consolidation by U.S. operators after ConocoPhillips clinched an all-stock takeover of Permian Basin heavyweight Concho Resources Inc.
Besides Monday’s mega-deal, Chevron Corp. recently snapped up Noble Energy Corp., and Devon Energy Corp. is taking over WPX Energy Inc., two deals that gave the buyers substantially more Permian power.
“I think it’s what you see when market efficiency starts to come into play,” Miller said. “There’s just a lot of costs associated with operating all these different companies. And so, I suspect at some level there’s the opportunity to better leverage and make more cash flow by bigger operators.”
The companies being acquired are not capturing their previous values as the stock prices are depressed. However, the “long-term outlook and the importance of that production is still very relevant,” the CEO said. “And so, in the discussions, I think that’s more of what I hear, is around how to be more efficient. Obviously, this is one way to be more efficient.”
OFS consolidation also is underway, which is “great for Halliburton,” Miller said.
“It’s happening as we expected it would happen.” Whether it’s “consolidation and attrition or rationalization, all of those things are conspiring to create tightness. But even in spite of not having the tightness today, we’re seeing the improving margins and returns.”
The Lower 48 oil and gas business should “continue to slim down and, as a result, emerge healthier in a relatively more sustainable growth environment in the future. And this plays to Halliburton strength and our disciplined strategy.
“The supply/demand balance for U.S. fracturing capacity is also improving. We estimate that close to 30% of hydraulic fracturing equipment has been permanently retired this year. We expect more will follow as demand remains structurally lower.”
The lack of reinvestment and insufficient returns by the OFS sector “should accelerate the cannibalization of idle equipment for parts and the use of sideline pumps to beef up working fleets. We anticipate a tighter balance between horsepower supply and demand as the U.S. achieves more stable production levels.”
There now is a “recovering demand for active capacity” to complete wells, he noted.
Call For Equipment
“The first warm-stack fleet reactivations are unlikely to see meaningful pricing improvement, but they will increase utilization and revenue on a lower cost base and make a positive contribution to earnings.
“The second step will happen when activity recovers enough to call on cold-stacked equipment to return to the market. I expect that higher pricing will be necessary to justify incremental investments.”
In the near term, expect to see a “divergence of rig and completions activity,” which could create “choppiness as balance sheets are repaired and reinvestment rates continue to adjust. However, we believe that our strategic priority for a leaner and more profitable North America will enable us to successfully navigate through this market contraction and power into the eventual recovery.”
Net losses in 3Q2020 were $17 million (minus 2 cents/share), versus a year-ago loss of $1.7 billion (minus $1.91) and down from sequential profits of $295 million (34 cents). Revenue fell by nearly half from a year ago to $2.9 billion from $5.5 billion, and by 7% from 2Q2020’s $3.2 billion.
During 3Q2020 Halliburton recorded a $133 million charge primarily because of severance costs. In 2Q2020 it recorded a $2.1 billion impairment to assets, inventory and severance costs.
Completion and Production revenue fell by 6% sequentially to $1.6 billion, while operating income climbed 33% to $212 million. Drilling and Evaluation revenue was down 8% from 2Q2020 at $1.4 billion, with operating income off 17% at $105 million.
North America revenue overall fell by 6% from 2Q2020 to $984 million on decreased well construction activity in U.S. land and reduced activity across multiple product service lines in the Gulf of Mexico. Partially offsetting the decline was higher stimulation activity and artificial lift sales in U.S. land.
International revenue was $2.0 billion, a 7% sequential decrease. However, Latin America revenue climbed 10% sequentially to $380 million, primarily from increased activity across multiple product service lines in Argentina, Colombia and Mexico, partially offset by reduced activity in Ecuador and lower completion tool sales in Guyana.
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