When oil services giant Schlumberger (SLB) missed earnings and reported a dour forecast, you just knew things for rivals Halliburton (HAL) and Baker Hughes (BHI) weren’t going to be great either.
HAL and BHI are in the middle of tying the knot and becoming one of the largest oil services giants. That mega-deal comes at a time when the energy industry is going through some pretty nasty growing pains.
And the new year’s outlook for both HAL & BHI highlights just how excruciating that pain could be.
It also shows just how important that pending merger deal will be for the two firms to succeed in the near term. For investors, both HAL’s & BHI’s earnings can serve as a wake-up to what’s going on in the oil patch.
HAL & BHI — OK Today…
Like SLB, both HAL & BHI’s earnings for the 4th quarter of 2014 were actually not too shabby. As you recall, the quarter started before prices for crude oil began to plunge. As such, both BHI & HAL reported some pretty decent numbers for both the three-month period and the full-year.
Halliburton managed to grow its profits by a hefty 14% and revenues by 15% during the fourth quarter. The oil services giant managed to make $1.19 per share in profits when adjusting out one-time gains and costs. That beat analyst estimates of only $1.10 per share. Revenues hit a whopping $8.7 billion as profits rose by 65% to hit $3.5 billion or $4.11 per share.
Not to be outdone, Baker Hughes reported that its fourth quarter earnings also smashed analysts’ estimates. Analysts had been looking for only $10.08 per share. However, BHI delivered adjusted earnings of $1.44 per share. Likewise, the third largest oil services firm delivered rising full-year revenue and profits.
Those are pretty good numbers, considering that both HAL & BHI get the vast bulk of their revenue from drilling activity in North America. As we’ve continued to drill into new shale formations, the two firms have benefited immensely. The only problem is we’re not fracking so much anymore.
With oil plunging around 60% over the last few weeks, drilling activity has begun to slowdown and energy producer’s CAPEX budgets are starting to dwindle. And that brings us to the depressing part of Halliburton’s and Baker Hughes’ earnings report: Their outlooks on the year ahead.
… Problems Tomorrow
HAL’s CEO Dave Lesar called 2015 “challenging at best” and noted that spending by the firm’s major customers had been cut been an average of 25 to 30% as a response to falling oil prices. That spending cut will result in less drilling activity — BHI predicts that the number of drilling rigs operating will fall by 15%. And looking at historical data (Baker Hughes publishes a weekly rig report), the bottom won’t hit until drilling counts fall by around 40%.
That means we have still a long way to go.
Both BHI & HAL expect the worse and have begun to react by laying off thousands of workers — both blue and white collar. In fact, those previously mentioned one-time charges in their earnings reports were for workforce reductions. Last month, Halliburton let go of a thousand employees, but said during its earnings conference call that its layoffs would be in line with its peers.
HAL’s peers — Baker Hughes and Schlumberger — laid off 7,000 and 9,000 employees, respectively. Martin Craighead, CEO of Baker Hughes said it best as BHI “must adapt to a new reality of sustained lower commodity prices.”
That doesn’t paint a pretty picture for smaller oil service firms like Basic Energy Services, Inc. (BAS) or Key Energy Services Inc. (KEG). Nor the energy sector as a whole.
The Merger Matters For HAL & BHI
Given the harsh realities now setting in on the energy sector, the pending merger between Halliburton and Baker Hughes becomes all the more important. As we’ve said before, the deal will create one of the largest oilfield services companies — one that will have the pricing power to survive the new low price oil environment.
As pretty much the only game in North America, the HAL/BHI combo should be able to flex its combined muscle and afford them the ability to charge E&P firms higher prices for oilfield services — especially in North America. Both HAL and BHI have been basically killing each other during the price decline to maintain and gain market share, hurting profitability on both fronts. And profitability will only become more important as margins become depressed.
The nearly $2 billion in cost savings from the deal won’t hurt, nor will the expanded global foot print in regions where state-owned energy firms drill.
All in all, the near term for HAL & BHI is most likely going to be a rough ride. However, the long-term picture is still quite rosy. The energy sector’s history is full of booms and busts. The duo is making some painful, but necessary steps to make sure that it’s around for when the sector recovers. And when it does, the newly minted HAL/BHI will be a force to be reckoned with.
As of this writing, Aaron Levitt held a position in the Vanguard Energy ETF (VDE), which holds SLB, HAL, BHI, BAS and KEG shares.
