Halliburton Earnings: Elevated Capacity Utilization Keeps Pricing Power in Favor of Service Firms

Halliburton’s HAL first-quarter earnings reflected significantly improved production activity compared with the same period last year. Total revenue increased 33% year over year and 2% sequentially, mostly led by a very strong North American market. Profitability trended similarly, with the firmwide operating margin expanding nearly 500 basis points year over year and contracting very slightly quarter over quarter. We maintain our narrow moat rating and $40 fair value estimate following results.

Persistently elevated North American production activity has created a tight equipment market that keeps pricing power in the hands of oilfield service firms. We expect the prevailing market dynamics will persist through 2023 as Halliburton and its peers maintain high capacity utilization across regional end markets. However, we expect the pace of North American activity growth will continue to moderate, with opportunities for further growth arising in international markets.

We’re especially optimistic about Halliburton’s prospects in the Middle East and Latin America, the two regions likely to garner elevated investment. Latin America in particular features a higher proportion of offshore opportunities, which tend to be more profitable than land-based projects. By our estimate, offshore projects generated roughly one fourth of Halliburton’s revenue this quarter, and we expect it will reflect a larger proportion of the business as offshore activity expands over the next several years. This, coupled with durable pricing gains and improved operating efficiency, should generate a firmwide operating margin of 16% in 2023, expanding 400 basis points year over year.