Normally, earnings season is a pretty joyous occasion in the energy patch. Unfortunately, this round of earnings reports is shaping to be a quite a tear-jerker — and the results from oil services giant Halliburton Company (NYSE:HAL) was no different.
But the market cheered anyway.
Beating Wall Street’s expectations is always great. But for investors and anyone contemplating buying HAL stock, it’s important to look at both sides of the coin — and one side is tarnished indeed.
HAL Stock: Some Good, Some Bad
Like recently reporting rival Schlumberger Limited (NYSE:SLB), HAL’s earnings report was the first full quarter that included the crude oil and shale crash. Rising supplies coupled with stalling oil demand has created a low-price environment for crude not seen in years. Producers have been cutting back and that’s hit oil service firms like HAL right where it hurts — in their wallets.
Despite that, Wall Street wasn’t too upset with HAL stock.
On the surface, HAL managed to give Wall Street what it wanted. In fact, it actually gave them more than analysts wanted. Halliburton reported earnings of 49 cents per share on revenue of $7.5 billion. The key for HAL was that both of those numbers actually beat Wall Street’s estimates for the quarter. The analyst consensus at Thomson Reuters had HAL earning 36 cents on revenue of $6.96 billion.
HAL stock promptly rallied on the news and finished 2% higher at the end of the day.
So the shale bust is over and everything is good in the oil patch once again? Not exactly. Looking closer at Halliburton’s earnings paints a slightly darker picture. To start with, that earnings beat was in reality an adjusted number.
Halliburton actually posted a loss of 76 cents in the first quarter. That loss comes from a hefty writedown — to the tune of $823 million — that covers asset and inventory writeoffs/writedowns, various impairments of intangible assets, severance costs and other charges related to the drilling slowdown. Additionally, Halliburton saw a $199 million currency loss as well as $35 million charge for its pending merger with rival Baker Hughes Incorporated (NYSE:BHI).
More than $1 billion in writedowns and charges isn’t exactly something to be ignored.
And even if you were looking at the adjusted numbers, they weren’t that great in the grand scheme of things. Yes, they beat Wall Street’s estimates, but they were also big declines year-over-year. HAL saw its earnings fall 33%, while operating income dropped 54%.
That’s because the drilling slowdown has been “unprecedented,” according to HAL chairman and CEO Dave Lesar. According to the oil services firm, U.S. rig land rig counts fell by 21% during the quarter and drilling activity by 50% since hitting a peak in November.
International rig counts — while still more resilient than the U.S. — have also declined by big numbers since November.
Those drilling and capital expenditure decreases have put pressure on HAL’s margins. According to investment bank Barclays, Halliburton’s margins for the first quarter dropped by more than 11% from the fourth quarter of 2014.
What’s more, HAL didn’t exactly proved any words of comfort when it announced its earnings and basically said that the downturn in drilling and oil prices is going to be long — there isn’t a clear end in sight.
Near-Term Pressure for HAL Stock
While the market certainly liked HAL’s adjusted earnings beat, it’s not exactly a slam-dunk win for Halliburton. Those margins are getting crimped pretty badly during the downturn. Barclay’s data shows that rival Schlumberger only saw a 6% decrease for the quarter. And the margins could fall a bit more as the next few quarters go on.
Failing to lay off as many workers as SLB — it axed nearly 20,000 total — and keeping prices for various oil services higher could result in an additional 2% to 3% decline in margins. That may pay off in the long term as it merges with BHI, but in the near term that could play right into the hands of SLB and result in Halliburton losing market share.
And in this current prolonged environment, you need every customer you can get.
That doesn’t necessarily put HAL stock into the “do not buy” camp for longer-termed investors — it’s just a word of caution and highlights how much of struggle the energy sector is becoming. Margin compression is never good and any additional decreases to Halliburton’s “real” earnings could be cause for real concern.
Until its merger with BHI is completed, we should expect more of these dual quarters from HAL. And investors need to evaluate each of them as they come up.
As of this writing, Aaron Levitt is long the Vanguard Energy ETF (NYSEARCA:VDE), which holds SLB, BHI and HAL stock.