Factors to Know Ahead of Halliburton's (HAL) Q1 Earnings

Halliburton Company HAL is expected to release first-quarter 2019 results before the opening bell on Monday, Apr 22. The current Zacks Consensus Estimate for the quarter under review is a profit of 23 cents on revenues of $5.5 billion.

In the preceding three-month period, the major oilfield service provider beat the consensus mark by 10.8% after robust international activity more than offset slowdown in the North American completion services demand that led to pricing pressure in the hydraulic fracturing business.

As far as earnings surprises are concerned, the Houston, TX-based company is on a firm footing, having gone past/met the Zacks Consensus Estimate thrice in the last four reports. This is depicted in the graph below:

Halliburton Company Price and EPS Surprise


Halliburton Company Price and EPS Surprise | Halliburton Company Quote

Investors are keeping their fingers crossed and hoping that the provider of technical products and services to drillers of oil and gas wells can continue winning ways by surpassing earnings estimate this time around too. However, our model indicates that world's second-largest oilfield services company after Schlumberger SLB might not beat on earnings in the first quarter.

Let’s delve deeper and find out the factors impacting the results.

Factors to Consider This Quarter

E&P Capital Discipline: Strong commodity prices typically lead to robust upstream activities. As exploration, drilling, and production picks up, oil service providers see a surge in their sales and profitability. Going by this logic, the first quarter – where oil prices rebounded more than 30% to the best quarterly performance in a decade – should have been a great one for oilfield service providers like Halliburton.

However, clients are taking a more conservative approach on their investment decisions. Per the new paradigm in the energy sector, a disciplined capital expenditure strategy (resulting in free cash flow) is being prioritized over reckless spending beyond operating cash flows. Consequently, major upstream oil companies are now committed to investor returns rather than adding production by outspending cash flows. This has created an extremely challenging operating environment for the service providers as there is not enough incentive to trigger investments in mature field development, exploring unconventional resources, or expanding offshore programs. This slowdown in activity hurts overall demand for services and equipment across the industry spectrum and does not bode well for Halliburton’s upcoming earnings release.

Lower Rig Count: During the first quarter of 2019, the U.S. oil rig count decreased by 69 (from 885 to 816) despite the oil price surge. While there is a typical delay of around three-four months between oil price changes and its reflection on rig counts, the statistics suggest weakening North American activity in the January-March timeframe. Halliburton, with sizable presence in the region, is expected to affected significantly on this sentiment.

Permian Takeaway Constraints: Pipeline takeaway capacity constraints in the Permian Basin seems to be another reason for apprehension about Halliburton’s prospects. Halliburton warned that a slowdown in the oil and gas rich-Permian Basin activity due to pipeline constraints will only alleviate during the second half of the year.

By now, it is well documented that serious logistical constraints in West Texas’s Permian ‘super basin’ is forcing operators in the region – especially those without committed pipeline capacity – to sell their produce at hefty discounts. This caused operators to slow down their drilling and production activity, impacting demand for oilfield services. In fact, there is a backlog of more than 4,000 drilled but uncompleted wells in the Permian Basin - indicating a slowdown in well completion activity.

As a proof of the market challenges, the Zacks Consensus Estimate for first-quarter Completion and Production adjusted operating income is pegged at $335 million, lower than $496 million reported in the previous quarter. To put things in perspective, the Completion and Production unit makes up more than three-fourths of the oilfield service provider’s total operating income.

Recovery in International Operations: One bright spot in the otherwise gloomy earnings outlook is the recovery in overseas markets. In the last quarter, Halliburton’s international business delivered top line growth of 7%. We expect the recovery to continue on the strength of the national oil companies who do not alter their budgets based on short-term oil price fluctuations. While one can expect normal seasonality to impact revenues to a certain extent, we are looking for project activity improvements in geographies like Asia Pacific, Africa and the North Sea. Importantly, the order uptick should be associated with incremental margins from aggressive cost controls.   

Earnings Whispers

Our proven model does not conclusively show that Halliburton will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -0.82%.

Zacks Rank: Halliburton currently has a Zacks Rank of 3, which increases the predictive power of ESP. But we need to have a positive Earnings ESP to be sure of the positive surprise.

Note that we caution against stocks with a Zacks Ranks #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing a negative estimate revision.

Stocks to Consider

While earnings beat looks uncertain for Halliburton, here are some companies from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Cabot Oil & Gas Corporation COG has an Earnings ESP of +1.88% and a Zacks Rank #1. The firm is expected to release earnings on Apr 26. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConocoPhillips COP has an Earnings ESP of +9.67% and a Zacks Rank #1. The company is anticipated to release earnings on Apr 30.

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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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