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Factors Setting the Tone for Halliburton's (HAL) Q2 Earnings

Halliburton Company HAL is set to release second-quarter 2020 results on Monday Jul 20, before the opening bell. The current Zacks Consensus Estimate for the to-be-reported quarter’s earnings is a loss of 10 cents per share and for revenues is $3.38 billion.

Let’s delve into the factors that might have influenced the company’s performance in the June quarter. But it’s worth taking a look at Halliburton’s previous-quarter performance first.

Highlights of Q1 Earnings & Surprise History

In the last reported quarter, this major oilfield service provider’s bottom line beat the consensus mark on robust international activity. Halliburton reported earnings per share of 31 cents, surpassing the Zacks Consensus Estimate by 6 cents. Moreover, the bottom line was higher than the year-ago quarter’s figure of 23 cents. Meanwhile, revenues of $5 billion declined 12% from the year-ago quarter’s number and marginally also missed the Zacks Consensus Estimate by $9 million.

As far as earnings surprises are concerned, this world's second-largest oilfield services company after Schlumberger SLB is on a solid footing, having outpaced the Zacks Consensus Estimate in three of the last four reports while meeting the same in the remaining quarter, the average positive surprise being 12.75%. 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

Factors to Consider

Management at this world’s biggest provider of hydraulic fracking noted that although North American activity levels in the first 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. While the latter part of the first quarter experienced the slowdown in activity across different regions, the company feels that the full impact of the coronavirus pandemic and the oil price slump will only be felt in the upcoming quarters. The crisis is expected to have left a deeper impact on the North American land operations during the second quarter and may be persistently weak throughout the remaining year.

Let’s analyze:

Slump in E&P Capital Spending:  Clients had 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 during the three-month period ending Mar 31, things took a turn for the worse.

In fact, the second quarter ended with the commodity priced at just above $39.27 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 second quarter. As a result, the Zacks Consensus Estimate for the company’s second-quarter operating income from the Completion & Production segment — the main contributor to Halliburton earnings — is pegged at $23.77 million. The segment recorded operating income of $470 million in the corresponding period of 2019.

Steep Drop in North American Rig Count: During the second quarter of 2020, U.S. rig count decreased 463 sequentially (from 728 to 265) in conjunction with the oil price crash. While there is a typical delay of around three-four months between oil price changes and its reflection on rig counts, the statistics suggest faltering North American drilling and completion activity in the April-June time frame. Halliburton, with a sizable presence in the region, is expected to have suffered heavily on this front.

International Markets Offer Hope: One bright spot in the earnings outlook is the strength in the overseas markets. Halliburton's international revenues increased 5% year over year in the first quarter of 2020, a trend that most likely continued in the second quarter as well.

While international E&Ps are also containing expenditure due to 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 are offshore and are difficult to offload from the portfolio suddenly.

Cost-Reduction Efforts Bode Well: Meanwhile, the company has also been impressive in 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 $1-billion cutback in overhead and other costs while netting in substantial savings from slashing the dividend. All this should drive the company’s earnings and cash flows higher.

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 +17.26%.

Zacks Rank: Halliburton 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:

Murphy USA Inc. MUSA has an Earnings ESP of +14.85% and a Zacks Rank of 3, currently. The company is scheduled to release earnings on Jul 21.

Suncor Energy Inc. SU has an Earnings ESP of +20.59% and is Zacks #3 Ranked, currently. The firm is scheduled to release earnings on Jul 22.

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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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