Following
Halliburton Company's
(
HAL
) second quarter profit warning, we have downgraded the oilfield
services behemoth to Underperform from Neutral.
Houston, Texas-based Halliburton is one of the largest oilfield
service providers in the world, offering a variety of equipment,
maintenance and engineering and construction services to the
energy, industrial and government sectors. The company operates
under two main segments: Completion and Production, and Drilling
and Evaluation.
Halliburton recently cautioned investors that a
higher-than-expected spike in the cost for guar gum - a key
constituent of the company's market-leading hydraulic fracturing
('fracking') procedure - will adversely impact its second quarter
results.
Guar gum, a bean grown mostly in India, apart from being a dairy
products thickener is also a main ingredient of the fracking
process, which is used to extract natural gas by blasting
underground rock formations with a mixture of water, sand and
chemicals.
As per Halliburton, demand for guar gum has gone through the
roof in North America following the growing use of fracking in the
extraction of oil and natural gas liquids from shale. This has led
to concerns about the commodity's potential shortage later in 2012,
thereby driving up guar gum prices more rapidly than previously
expected.
The rising costs, according to the company, have affected its
second quarter profitability in North America. The world's
second-largest oilfield services firm after
Schlumberger Ltd.
(
SLB
) now sees margins in the region to be down by 300 basis points
more than the previous forecast of a 200-250 basis points squeeze,
implying a 500-550 point drop from the first-quarter levels.
Additionally, the North American land rig count, which has
experienced strong upward momentum over the last twelve months, may
plateau in the near future as growth in highly-productive
horizontal drilling has led to a natural gas supply overhang and
relatively weak natural gas prices in the U.S. market. This is
likely to be only partially offset by the continued growth of oil-
and liquids-rich reservoirs. A slowdown in U.S. land drilling will
adversely impact Halliburton's business.
Lastly, we expect Halliburton shares to remain soft until it
fully works its way through claims related to the Deepwater Horizon
incident. We are also concerned by the slow and geographically
uneven recovery in Halliburton's international markets.
Given these concerns, we expect Halliburton to perform below its
peers and industry levels in the coming months. As such, we see
little reason for investors to own the stock.
HALLIBURTON CO (HAL): Free Stock Analysis
Report
SCHLUMBERGER LT (SLB): Free Stock Analysis
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