This article was originally published by TheStreet on May 07, 2014
By Sarfaraz A. Khan. Research assistant: Gohar Yousuf
NEW YORK (TheStreet) -- When Halliburton (HAL_) reported its quarterly results on April 21, it failed to post any increase in profits. Yet its shares are up 5.8% since the earnings release as of 3:15 p.m. Wednesday -- close to 52-week highs.
That is because the company, which has struggled due to the weakness in the North American oil pressure pumping prices, has projected 25% growth in earnings in the next quarter, driven by an expected uptake in activity.
Moreover, analysts have forecast an increase in exploration and production expenditure and rig count, both in and outside of North America, for the next couple of years. This will fuel Halliburton's revenue and income growth in the coming quarters.
Halliburton's shares are up nearly 27% for the year to date, currently around $64.50, easily outperforming the S&P 500 (SPY), which is up 2.7% in the same period.
Despite the rally, the company's shares are trading just 20.8 times its trailing earnings and 1.8 times its trailing sales, significantly cheaper than most of its peers. The industry average share price is 2.48 times trailing sales and 44 times trailing earnings, according to Thomson Reuters.
In the first quarter of the current fiscal year, Halliburton swung to a net income from continuing operations of $623 million after a loss of $13 million in the same quarter last year. However, excluding the $637 million in charges related to the Macondo litigation recorded in the prior year, the company's earnings were flat. Its revenue, on the other hand, climbed 5.4% to first-quarter record levels of $7.35 billion.
Halliburton's revenue from North America increased by 5.3% year-over-year to $3.90 billion, but operating income dropped by 0.5% to $602 million. Unlike Schlumberger (SLB_), and much like Baker Hughes (BHI_), Halliburton gets more than 50% of its revenues and more than 60% of its operating income from North America.
The severe winter weather conditions as well as an increase in freight and fuel costs and lower pressure pumping prices had an adverse impact on Halliburton's operations in North America.
On the other hand, Halliburton's robust growth in the international markets is making up for the sluggishness at home. Halliburton has reported a 13.5% growth in revenues and 12.8% growth in operating income from the Middle East and Asia, driven by an increase in rig count in Saudi Arabia.
The company's Middle East and Asia region has now become nearly as large as its second-biggest market, which covers Europe, Africa and the Commonwealth of Independent States region of former Soviet nations. The company reported a 9% and 21% increase in revenues and operating income from Europe, Africa and CIS.
Oilfield services companies in the U.S. have been facing a challenging situation due to the oversupply of hydraulic-fracturing equipment. That has created a weak pricing environment. Moreover, the increasing competition from smaller rivals is also making things difficult. As a result, Halliburton's operating margin from North America has dropped from 16.3% in the same quarter last year to 15.43% in the previous quarter.
Halliburton, however, is quite optimistic about its future in this region. The company has forecast consistent improvement in margins from the current quarter, which would expand to 20% by the end of current year.
For the next quarter, Halliburton has targeted a 25% sequential increase in earnings driven by a strong performance in North America.
In the current and the next quarter, Halliburton will benefit from the absence of the winter weather.
Furthermore, due to the higher natural gas prices and strong energy demand, Barclays Capital predicts that American energy companies could spend $156 billion this year on exploration and production, or 8% growth from last year. Similarly, RBC Capital Markets has projected 8% growth in the number of horizontal wells for 2013 and 7.4% growth in 2015.
Since Halliburton is the biggest provider of North American hydraulic fracturing services, it stands to become the biggest beneficiary of these positive trends.
The company has already said that it has witnessed an uptake in activity at the Permian Basin in West Texas, which is absorbing the excess capacity of the hydraulic-fracturing equipment. This could push prices higher, which will translate into an increase in revenues and earnings.
As for the Middle East -- already one of Halliburton's best growth areas -- the company has forecast further improvement in the future. The markets are expecting around 17% growth in rig count and a 14% increase in exploration and production expenditure from this region, which will fuel Halliburton's growth.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
