Third Quarter Report: Profits Fall For Halliburton

International performance helped soften the impact of activity declines and pricing pressure in North America for Halliburton Co. (NYSE: HAL) in what company executives called a challenging third quarter.

“Activity levels and pricing took another hit across the globe as our customers responded to the impact of reduced commodity prices and the pressure that their own shareholders are putting on them,” Halliburton CEO Dave Lesar said on a conference call Oct. 19. “Considering the difficult headwinds that we are working against I’m actually very pleased with our overall financial results for the third quarter, especially for our Eastern Hemisphere operations.”

The company brought in $5.6 billion in revenue for third-quarter (Q3) 2015, down from $8.7 billion from Q3 2014 and down 6% sequentially, as lower commodity prices prompted oil and gas companies to cut back on drilling activity and trim capex spending. In turn, oilfield service companies—including Halliburton—lowered their prices to keep customers from looking elsewhere and cut jobs.

“Now these are always tough decisions affecting great people. But they are simply decisions that we have to make,” Halliburton President Jeff Miller.

Halliburton has reduced its global workforce by more than 21% this year, including the elimination of an entire level of management in North America during Q3.

“In my view this is not a one-time initiative,” Miller said. “By clarifying and controlling how we execute we can retain this efficiency, these cost savings, as the market recovers.”

Company executives did not elaborate further on the possibility of future job cuts as it endures the latest downturn and works to close its merger with Baker Hughes Inc. (NYSE: BHI) by Dec. 16. Company executives warned approval of the deal could be pushed from year-end 2015 into 2016.

International

Halliburton typically makes the bulk of its profit from North American operations, but the company reported revenue of about $3 billion from markets outside of North America. The amount was down about 22% compared to last year, but only 5% sequentially.

Revenue from the Middle East and Asia region for Q3 2015 dropped from $1.5 billion in Q2 2015 to about $1.3 billion in the Q3. Revenue from the Africa, Europe and CIS region fell from about $1.5 billion to about $1 billion; while Latin America revenue fell from about $1 billion to $739 million.

“The international markets have held up better than North America, but they are not immune to the impact of lower commodity prices,” Lesar said. “Although we have had to concede some on pricing, we have worked closely with our customers during the past year to improve their project economics through technology and operating efficiency.”

North America

In North America, revenue for the world’s second-largest oilfield services company fell to about $2.5 billion. The drop is just less than half of the amount earned, about $4.7 billion, for the comparable quarter last year but slightly lower than second-quarter 2015’s $2.7 billion profit.

The company’s pumping-related product lines took the biggest hit. North America completion and production operating income plummeted 167%, or $122 million, sequentially on downward pricing adjustments and less activity.

However, “from the peak that we saw last November our completions relations activity has declined approximately 18% relative to a 58% reduction in the U.S. land rig count,” Lesar said. “This clearly demonstrates the costumers’ flight to quality that has emerged during this downturn and it positions us well for when the market recovers.”

But the drilling-related business fared better.

“Drilling division margins increased this quarter to 10 percent,” Miller said. He added that certain products have also seen increased uptake during the downturn. Adoption of DecisionSpace, geoscience interpretation workflow technology, is up double-digits from 2014, while AccessFrac stimulation service has grown more than 60% over the past year, he said.

Looking Forward

Like its peers, Halliburton is preparing for the wintertime slowdown. Activity levels are expected to drop substantially during late November and throughout December.

“Looking ahead to the fourth quarter, visibility is murky at best,” Lesar said. “Based on current feedback, we believe most operators have exhausted their 2015 budgets and will take extended breaks starting as early as Thanksgiving.”

Lesar was more optimistic about 2016.

Although first-quarter 2016 could mirror the fourth quarter, he said, the situation could improve with more activity in the second half of 2016. Internationally, he foresees resiliency in land-based activity, including mature fields, but more project delays offshore.

In the meantime, the company—like others—will be watching movements on oil production, rig counts, operators’ cash flow and how redeterminations are impacting its customers’ credit lines.

“There is a lot of uncertainty as we approach the holiday season but we believe customers’ budgets will reload in the first quarter, and we anticipate activity will ramp up in the second half of 2016,” Lesar said, noting Halliburton expects North America will offer the greatest upside when the recovery comes.

“There is no doubt that this is going to be a bumpy road … but history will tell you that we have outperformed in these kinds of markets, turning them into a new catalyst for growth.”

Schlumberger Ltd. (NYSE: SLB) reported on Oct. 16 that Q3 2015 revenue fell by 34% to about $8.5 billion compared to the same time last year. The decline was the highest in North America, where shale operators are slowing production amid the worldwide supply glut, with revenue at $2.3 billion, a 47% drop. Performance in international markets also fell—27% to about $6.1 billion.

Baker Hughes and Weatherford International (NYSE: WFT) are each scheduled to deliver their Q3 results later this week.

Velda Addison can be reached at vaddison@hartenergy.com.