Shares of Halliburton CompanyHAL dipped around 6% to close at $37.13 on Sep 5, after the company's CEO Jeff Miller stated that the oil services giant's third-quarter earnings are likely to be impacted owing to certain headwinds. Miller believes that the fall in activity levels in the Permian play amid pipeline woes will dampen the prospects of the company in the third quarter. Additionally, sluggishness in the Middle East contracts, stringent labour market and high inflation costs will add to the woes.
Notably, during Halliburton's second-quarter call, management had already warned investors that a slowdown in production growth in the Permian Basin due to infrastructural bottlenecks will weigh on the company's earnings for the remainder of 2018. The latest guidance reflects a decline of 29% than what was expected about two months back. The company's third-quarter earnings are projected to fall by 8-10 cents per share.
In fact, until oil prices climb further to increase the demand of the company's services and the pipeline projects come online, Halliburton, a Zacks Rank #5 (Strong Sell) company, is likely to face tough times in the near future. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Interestingly, the recent bleak outlook comes just a day after the biggest oilfield services company Schlumberger Limited SLB warned its shareholders that the lack of takeaway capacity might reduce Permian production, hampering the business of the firm. However, given Schlumberger's greater reliance on lucrative international market, its near-term prospects do not appear as dull as Halliburton, which derives most of its revenues from North American operations.
What's the Crux of the Matter?
With production growth on a tear in the Permian Basin, pipelines of the region are under immense pressure. In fact, expanding volumes have begun to outstrip the pipeline takeaway capacity of the Permian Basin, pushing the regional prices to a four-year low. A glut of crude waiting to be transported out of the Permian play has forced operators to accept steep discounts on their produce. Hence, despite the crude rally, the Permian dilemma has started affecting the performance of the energy producers operating in the region. Prospects of the hydraulic fracturing market also do not look bright, with producers suspending the completion of wells.
These challenges are likely to force producers to slow down production as well as investment levels. Also, any slowdown in drilling activities will eventually hurt the oilfield services market, which had just recently started to rebound from the dark days of the 2014 oil slump.
Trying Times for Oilfield Service Operators in Horizon?
With takeaway capacity concerns aggravating, various upstream operators like ConocoPhillips and Noble Energy Inc., among others, have started to re-evaluate their strategies. ConocoPhillips intends to put the brakes on production and deploy some of its rigs to the less-congested Eagle Ford region for securing better prices and transportation facilities. Noble Energy also plans to move some of its rigs from Permian to DJ basin region, which does not face a takeaway crisis. Other companies like EOG Resources intend to put a pause on Permian production until the required infrastructure is in place.
Many producers have now become reluctant to increase their spending levels until the takeaway problem gets sorted. While there are several Permian pipeline projects lined up, it will definitely take a year or more for everything to settle in place.
Reducing spending and lower production activities are likely to hit the oilfield services players once again. The latest warnings by two biggies, Halliburton and Schlumberger, pose risks to peers including Weatherford International plc WFT and Baker Hughes BHGE , a GE company, both of whose shares declined 3.83% and 2.19% on Sep 5.
However, it should also be noted that while Permian activities will be witnessing a slowdown, there are other lucrative shale plays including Bakken in North Dakota, STACK formation in Oklahoma, et al. Also, greater reliance on international markets and offshore projects might neutralize the impact of Permian problems. Hence, oilfield service players with greater presence and dependence on North American activities are more likely to face a rough patch due to the transportation crisis, unlike other operators with presence in various energy markets across the world.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportWeatherford International PLC (WFT): Free Stock Analysis ReportSchlumberger Limited (SLB): Free Stock Analysis ReportHalliburton Company (HAL): Free Stock Analysis ReportBaker Hughes, a GE company (BHGE): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research