Gloomy 2015 Overshadows Halliburton's Solid Quarter
But our valuation already accounts for deteriorating conditions.
Halliburton (HAL) reported strong quarterly earnings this week, highlighted by solid fourth-quarter revenue and operating income growth. The firm will not get much of a chance to celebrate, however, as market fundamentals have shifted significantly in response to the recent oil price declines. Drilling activity in North America, as measured by rig count, is down about 15% from highs reached at the end of the third quarter, and we expect upstream operators to continue to shed rigs as they look to dial back capital expenditures. This will pressure the large oil services firms in terms of reduced revenue from lower activity levels and pricing cuts. Further, we believe it will be difficult for services companies to cut costs as fast as revenue falls, pressuring margins. Our valuation of Halliburton already reflects our expectation for deteriorating conditions in 2015 and the pending merger with Baker Hughes (BHI), so we are making no changes to our $60 fair value estimate or narrow Morningstar Economic Moat Rating at this time.
Halliburton emphasized its strong financial and market position as a bulwark against the current downcycle. One particular argument made by management resonates with us: Drilling and completion technology that reduces cost per barrel for producers is likely to experience less pricing pressure. For instance, Halliburton plans to take advantage of the downturn to increase the penetration of its Frac of the Future equipment from 30% of its fleet today to 50% by year-end, positioning the firm well for the eventual upswing.
Jason Stevens does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.