Halliburton: Latin America Will Weigh Monday

Venezuela President Nicolas Maduro

Halliburton (HAL) reports Q4 earnings Monday. Analysts expect revenue of $5.63 billion and eps of $0.46. The revenue estimate implies a 3% increase sequentially. Investors should focus on the following key items:

How Long Can North America Hold Up?

Along with Schlumberger (SLB) and Baker Hughes, a GE Company (BHGE) Halliburton makes up the big three oil services firms. It gets a whopping 58% of its revenue from North America; that is convenient given that the region is the hottest area of the oil services market.

Its Q3 revenue was up 10% Y/Y, while revenue from North America was up a gaudy 14%. North America’s performance followed a 24% rise in Q2. The question remains, “How long can North America hold up?” In Q2 Halliburton management thought the rig count in North America could flatten, causing North America shale plays to tap the brakes on additional E&P:

Today, rig count growth is showing signs of plateauing and customers are tapping the brakes. This demonstrates that individual companies are making rational decision in the best interest of their shareholders. This tapping of the brakes is happening all over the place in North America. I can tell you the market will respond, it will rebalance and these companies will stay alive, survive and thrive because that’s what they do.

At Q2 2017 the U.S. rig count was at 940. For the week ended January 12, 2018 it was at 939, up over 40% Y/Y and up by 15 versus the previous week. With oil prices are hovering around $70 E&P for U.S. land drilling is still looking strong. As long as OPEC holds the line on supply cuts it could remain that way for the near term.

Latin America Could Weigh

Halliburton’s revenue from Latin America was up 4% Y/Y. That bested Schlumberger whose Q3 revenue from the region was actually down 8%. Schlumberger has curtailed some its operations in Venezuela due to its state-owned oil company’s inability to pay its bills. Both Halliburton and Schlumberger had previously used their balance sheets to finance equipment and services for PDVSA. Halliburton still has over $400 million of credit risk to PDVSA.

The company has $1.9 billion in cash on hand, and quarterly EBITDA of over $1 billion. It could absorb a few hundred million in asset write-offs. However, it receives about 10% of its revenue from Latin America. I expect a pullback in Latin America revenue this quarter due to PDSVA’s decline in drilling activity alone. Halliburton could become highly-dependent on North America to help offset headwinds in Latin America, which I believe could be intractable.

Halliburton has been one of the largest beneficiaries of the spike in oil prices over the past year. Its Q3 EBITDA of $1 billion was double that of the year earlier period. Its credit metrics had deteriorated to the point where it was at risk of a Moody’s downgrade. The company’s $10.9 billion debt load is now at a respectable 2.7x run-rate EBITDA. That could change if North America and Latin America turn down simultaneously. This is the biggest risk I see for the company.


HAL will likely meet or exceed expectations on the strength of North America. However, Latin America could be headwind. At 13x run-rate EBITDA HAL is a hold into earnings.

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