Halliburton Posts An Extraordinary Q4, But Outlook Stays Dim

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Jan 22, 2015

Oilfield services giant Halliburton Company (HAL, Financial) reported strong fourth-quarter results before the bell on January 20 outpacing the Street estimates in terms of both revenue and earnings. In the presence of headwinds such as plummeting oil prices the oil major was able to sustain its numbers and grow its profits for the entire fiscal year 2014. However, the management is not upbeat on the coming fiscal year and has lowered its outlook for 2015. Let’s quickly get into the number mix that got reported for the fourth quarter and decipher the major highlights from the report card.

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A quick glance at the quarter

Following Baker Hughes (BHI, Financial) and Schlumberger (SLB, Financial), Halliburton stepped up as the third member of the "big four oil services companies" to post above-consensus earnings. Earnings per share from operations came in at $1.19 a share, beating the Street consensus of $1.11 a share and improving from the previous year’s similar quarter earnings of $0.93 a share.

However, this number did exclude the restructuring charges as well as the costs linked to acquisitions. On making those adjustments, the earnings came at $1.06 a share, which is below the $1.33 a share that was reported in the third quarter. But still the earnings were firm, considering the dramatic decline in crude oil prices.

Revenue was also strong in the quarter as the company reported $8.8 billion which was in line with the Street estimates. Notably, in the presence of headwinds the company has reported a 15% increase in revenue on a year-over-year basis. During the quarter, North America accounted for approximately 54% of Halliburton’s total revenue and 64% of its total operating income. Also the drilling operations in the Middle East and Asia regions were solid during the quarter thus driving the results further.

Operational segments performed well

Revenue at Halliburton’s Completion and Production segment were almost in line with the third quarter results and increased 21% year-over-year to $5.5 billion. However, operating income from this segment dropped sequentially 8% and this could be attributed to the lower activities in Russia, Angola, and the North Sea.

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Nevertheless, this unit’s profits grew by a significant 30% from the previous year’s quarter, owing to increased cementing work in the U.S.

There was also growth in the drilling segment where the revenues improved 7% year-over-year to $3.3 billion. This improvement was mainly due to higher drilling operations in the Middle East and Asia regions.

Balance sheet remains strong

Considering the capex of $999 million in the fourth quarter, the full-year spending was around $3.3 billion. As on December 31, the company had approximately $2.3 billion in cash and $7.8 billion in long term debt. In the current scenario when the company is facing pressure in the North American region as shale drillers are cutting capex spending by over 50%, it is notable that Halliburton has been able to sustain its cash balance at positive levels.

Future is cast with warning signals

Halliburton expects the oil prices to remain weak throughout 2015. Hence, the company has warned investors that, although it has come out with remarkable numbers for 2014, the situation might see a change in 2015 as oil continues to show a slide in the prices. CEO Dave Lesar commented during the earnings call, “We delivered an excellent 2014, but it is clear that 2015 will be a challenging year for the industry. As a result of the weakening outlook, during the fourth quarter of 2014 we took a $129 million restructuring charge to temper the impact of anticipated activity declines…”

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The company has already laid off around 1,000 workers as it intends to keep the workforce aligned with the expected industry activity. Also with the drilling activity coming under pressure, the future of the company looks dim since this segment contributes to about two-thirds of its total operating income.

Meanwhile, the company has indicated that much of its time would be spend in 2015 on the completion of the acquisition of Baker Hughes which could be delayed as well, thereby increasing the acquisition related-costs and serving as a drag on the 2015 full-year results.

Final word

Overall, the fourth-quarter results were spectacular, given the current existing environment, but as the challenges are expected to persist in 2015 there could be turmoil in the oil markets as drilling activity in the U.S. is expected to decline phenomenally this year. But the oilfield services major knows how to grow its cash balance and the acquisition of Baker Hughes is all set to place it at the top of the list of oilfield services companies in the long run. Such temporary phases are set to disappear as soon as the crude oil prices begin to gain strength, but until then the company will resort to cost-cutting measures to sustain its balance sheet at a decent level.