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Can Solid Overseas Market Aid Halliburton (HAL) Q3 Earnings?

Halliburton Company HAL is set to release third-quarter 2020 results on Monday Oct 19, before the opening bell. The current Zacks Consensus Estimate for the to-be-reported quarter’s earnings is pegged at 8 cents per share and for revenues stands at $3.09 billion.

Let’s delve into the factors that might have influenced the company’s performance in the September quarter.

Factors to Consider for Q3 Results

Management at this world’s biggest provider of hydraulic fracking noted that although North American activity levels in the second quarter ramped down, the company continues to successfully ride the wave of changing market dynamics through excellent execution and regulation of the controllable factors.

Notably, Halliburton is enduring the double whammy of coronavirus-forced demand depletion and the supply glut. The crisis is expected to have deeply affected the North American land operations during the third quarter and this weakness may persist throughout the remaining year.

Let’s analyze:

Slump in E&P Capital Spending:  Clients have been taking a conservative approach to their investment decisions even before the oil price collapsed. Consequently, major upstream oil companies were committed to investor returns rather than extending production by outspending cash flows. This created an extremely challenging operating environment for the service providers. With crude prices crashing since the first quarter, things took a turn for the worse.

In fact, the third quarter ended with the commodity priced at just $40.22 a barrel, which is certainly not enough to trigger investments in mature field development, exploring unconventional resources or expanding offshore programs. This sluggish activity is likely to have hurt demand for Halliburton’s services and equipment in the September quarter. As a result, the Zacks Consensus Estimate for the company’s third-quarter operating income from the Completion & Production segment — the main contributor to Halliburton earnings — is pegged at $187 million. The segment recorded an operating income of $446 million in the corresponding period of 2019.

Drop in North American Rig Count Continues: During the third quarter of 2020, U.S. rig count decreased sequentially from 265 to 261 in sync with the oil price crash. While there is a typical delay of around three-four months between oil price changes and the resultant reflection on rig counts, the statistics suggest faltering North American drilling and completion activity in the July-September time frame. Therefore Halliburton with a sizable presence in the region is expected to have suffered on this front.

However, on a somewhat positive note, there are factors that might have offset the effects of the above-mentioned headwinds.

International Markets Offer Hope: One bright spot in the earnings outlook is the strength in the overseas markets. While the international E&Ps are also containing expenditure due to the continued softness in oil prices, the degree of deterioration is likely to have been less than North America. This is because most offshore projects are backed by national oil companies and/or integrated majors that target the long haul. Moreover, a considerable proportion of international projects sanctioned over the past few years is offshore and is difficult to be offloaded from the portfolio suddenly.

Cost-Reduction Efforts Bode Well:The company steadily impressed with its cost-saving measures. Halliburton’s capital expenditure continues to fall as the company reins in its spending levels. For 2020, the company intends to lower its capital budget to almost half at $800 million. Halliburton is also pushing for a $1-billion cutback in overhead and other costs while netting in substantial savings from slashing its dividend. All these should drive the company’s earnings and cash flows higher.

Highlights of Q2 Earnings & Surprise History

In the last reported quarter, this major oilfield service provider delivered better-than-expected earnings as both the Completion and Production segment and the Drilling and Evaluation segment outperformed the respective Zacks Consensus Estimate. While the company reported earnings of 5 cents per share, the Zacks Consensus Estimate was of a loss of 11 cents per share.

However, the bottom line tumbled 85.7% from the year-ago earnings figure of 35 cents per share due to lower revenue contribution from North America activities. Revenues of $3.2 billion slumped 46% from the year-ago quarter’s sales and also missed the Zacks Consensus Estimate of $3.26 billion.

As far as earnings surprises are concerned, this world's second-largest oilfield services company after Schlumberger SLB is on a solid footing. Evidently, its bottom line outpaced the Zacks Consensus Estimate in three of the last four quarterly reports, meeting the same in the remaining quarter. The average surprise is 44.95%. This is depicted in the graph below:

Halliburton Company Price and EPS Surprise

Halliburton Company Price and EPS Surprise

Halliburton Company price-eps-surprise | Halliburton Company Quote

What Does Our Model Say?

Our proven Zacks model predicts an earnings beat for Halliburton this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Halliburton has an Earnings ESP of +4.94%.

Zacks Rank: Halliburton currently has a Zacks Rank #3, which increases the predictive power of ESP. You can see the complete list of today’s Zacks #1 Rank stocks here.

Other Stocks to Consider

Some other firms worth considering from the energy space on the basis of our model that shows that these too have the right combination of elements to beat on earnings this season are as follows:

Core Laboratories N.V. CLB has an Earnings ESP of +7.87% and a Zacks Rank of 3, currently. The company is scheduled to release earnings on Oct 21.

Parsley Energy, Inc. PE has an Earnings ESP of +72.71% and is Zacks #2 Ranked, currently. The firm is scheduled to release earnings on Oct 28.

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Schlumberger Limited (SLB): Free Stock Analysis Report
 
Halliburton Company (HAL): Free Stock Analysis Report
 
Core Laboratories N.V. (CLB): Free Stock Analysis Report
 
Parsley Energy, Inc. (PE): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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