Investors Unconvinced By Halliburton’s Shale Optimism

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By Nick Cunningham

Halliburton said that the market for oilfield services had reached a bottom and was poised for a rebound, a statement that initially led to a jump in its share price. However, after the company offered scant details, investors seem to have lost confidence in the outlook.

Last week, the largest oilfield services company in the world, Schlumberger, offered a two-track outlook for the oil market. Internationally, years of under-investment combined with rising oil prices has led to a rebound. Companies are beginning to greenlight new projects, and drilling activity is on the upswing.

At the same time, the U.S. shale industry is hurting, and years of debt-fueled drilling is giving way to more scrutiny from shareholders and a slowdown in drilling, which is bad news for the oilfield services companies. In short, Schlumberger was optimistic about its projects around the world, but concerned about what was unfolding in the U.S. shale patch.

Halliburton, the second largest oilfield services firm, echoed much of this view, but struck a much more upbeat tone on North America when it reported its first quarter results on Monday. “As expected, the first quarter activity levels in North America were modestly higher compared to the first quarter of 2018, and we experienced pricing headwinds throughout the quarter,” Halliburton CEO Jeff Miller said in a statement. “We believe the worst in the pricing deterioration is now behind us. For the next couple of quarters, I see demand for our services progressing modestly.”

Like Schlumberger, Halliburton posted gains in revenue in the Middle East (Saudi Arabia) and Latin America (particularly Mexico and Argentina). The two companies agreed on that much. But they differed on what to expect from U.S. shale.

Given the steep fall in the rig count since late 2018 and the flattening of production growth in the U.S., Halliburton’s guidance about North America would appear to be very optimistic. Halliburton initially saw its share price rise on the news. However, on an earnings call with analysts and shareholders, top management did not offer more specifics or detail on why they were so optimistic.

Halliburton sees the North American oil industry on the whole cutting spending by 6 to 10 percent. “I expect that customers will operate within their budgets largely by achieving savings through sand cost deflation and by reducing drilling activity,” Miller said on the earnings call. “On the other hand, I believe that net completions activity will remain essentially flat year-on-year as our customers seek to achieve their publicized production targets.” He went on to say that activity picked up in March and he expects that to continue for the next few months. But when pressed by analysts for specifics on why the market in North America had turned a corner, Miller was rather vague.

“I don’t think there was anything in there to get people off the sidelines,” Jennifer Rowland, an analyst at brokerage Edward Jones, told Reuters. “We are still kind of in the hope phase that the second half is going to look better.” Several analysts circled back on the earnings call to Halliburton’s upbeat view on North America, and while Miller made a few different arguments, the core of his belief came down to the shale industry being determined to hit their production targets.

Halliburton’s share price initially jumped Monday morning, but gave up much of those gains.

Where Halliburton did offer detail was on the supply side of the services industry. Jeff Miller argued that because shale drillers have intensified so many stages of their operations – longer laterals, more sand, more hours per day that companies are operating – all of the equipment needed in drilling operations is suffering from heightened wear and tear.

“Halliburton is currently pushing 30% more sand volume through equipment than in 2016. The shift to local sand that is finer and more abrasive also leads to more equipment wear,” Miller argued. “Last year, we fracked 20% more stages per horsepower than we did in 2016… Industry sources estimate that about 7.5 million hydraulic horsepower will need to be rebuilt in 2019 to maintain a flat horsepower supply. This equates to $1.7 billion in equipment spend that I do not see forthcoming as the service companies have cut capital spending plans.”

In other words, because drilling operations are more intense than they used to be, equipment tends to have shorter lifespans. If Halliburton and its peers do not invest in replacing that equipment, the supply of oilfield services contracts, which should push up pricing for all of those services. Because Halliburton is so big, the impact could hit smaller service companies more significantly. If the services sector contracts, that’s good for Halliburton, as its array of equipment and services can garner higher prices.

The flip side of that equations it that oil producers, who pay companies like Halliburton to for fracking services, may have to cough up more money.

Crude Oil

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