Saturday, January 26, 2013

HAL Q4 Earnings

Halliburton (HAL) reported earnings on January 25, 2013.  The company reported a profit of $0.63 per diluted share on record quarterly revenues of $7.3 billion, beating consensus of $0.61 per diluted share.  This news resulted in a price increase of 5.05% on the day, ending at $39.72.  This price represents a profit of 18% over our purchase price of $33.66.

In the 4th quarter, revenue and income from international operations made up for lower revenues and operating income in North America.  In North America, revenues were hurt by a decline in land drilling activity, as drilling & exploration companies began to approach or exceed their yearly capital expenditure budgets, and from downward pressure on hydraulic fracturing services, from increased competition.  North American margins also remained suppressed from lagging effects of an overpriced inventory of guar gum, a key ingredient for its operations.  In Latin America and Middle East/Asia, revenues were driven up primarily by increased activity in a number of areas, as well as higher software sales.  The Europe/Africa/CIS region was driven positively by increased demand around the North Sea, Russia, and Eastern Africa. 

It was acknowledged that the company would lose revenue and suffer from depressed margins in North America, but this downward trend should be reduced as Halliburton’s supply of guar gum is used up and as it reaps the benefits of its "Frac of the Future" program and other strategic initiatives.  As Halliburton continues to improve the quality of its services it will be able to command higher fees than its competitors, partially offsetting the effect of a more competitive atmosphere.  The company should also continue to see growth in the Eastern Hemisphere, as more companies are looking into offshore opportunities in the North Sea, Africa, and Australia. 

Going forward to the next fiscal year, the company looks to be in sound financial position.  The company has enough cash and flexibility under its revolving credit facility to withstand any downturns in the economy, or in case of a large payout to BP for its role in the Macondo well incident in 2010.  We are going to reevaluate our model on Halliburton to see if the original price target of $44.00 should be raised and to make a more educated decision about whether we would like to enter into a full position.

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