Halliburton Earnings Preview: It's All About the Margins

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Halliburton (NYSE: HAL), one of the leaders in oilfield services, is on pace to have its best year ever in terms of revenue and earnings.  The stock has rewarded its investors nicely over the past decade, from a low of $4.30 in 2002 to the current level of around $38 per share, a very nice return. With Halliburton set to report earnings next Friday, the numbers and comments will provide clues as to the future growth of this company, and the state of the industry in general.

 

 

Halliburton’s revenue makes it the second largest oilfield services company in the world, behind only its chief rival, Schlumberger (NYSE: SLB).  The company provides engineering and construction services to a variety of customers.  Halliburton’s customer base includes integrated oil companies, nationalized oil companies like Petrobras and independent exploration and production companies.  Although Halliburton is a global company, the majority of its revenue still comes from North America (58%), followed by Europe (16%), the Middle East and Asia (14%) and Latin America (12%).  Basically, Halliburton is the market leader in the U.S., while Schlumberger has a commanding lead in the international markets.  

In terms of future growth, although most of the company’s revenue is domestic, the oilfield service market in the eastern hemisphere is growing at a much faster pace and hence should be the largest driver of future growth.  Halliburton has expressed its determination to close the gap with Schlumberger overseas.  An example of this new strategy is the 2007 move of the company headquarters to Dubai from Houston, signifying the growing importance of Eastern business to the company. 

Halliburton has grown its earnings quite nicely and has also rebounded very nicely from the dip in earnings following the bursting of the oil bubble in 2008.  In the peak pre-crisis year, 2007, Halliburton earned $2.64 per share.  The company managed to break through that level in 2011 with earnings of $3.26 and is on pace to have comparable earnings this year.

 

 

Speaking of growth and valuation, although Halliburton has been setting new highs in terms of revenue, their operating margins can fluctuate wildly, making it difficult to predict their earnings beyond a year or so.  Despite this, most analysts see their margins staying about the same for the next year, before widening considerably in late 2013.  When the company reports this week, consensus estimates call for 2012 earnings of $2.98, meaning the stock currently trades at right around 12 times TTM earnings.  With the concerns over margins next year, 2013’s earnings are projected to rise by just a penny to $2.99, however they are expected to shoot up to $3.95 in 2014.  While stating that the stock trades at only 9.2 times 2014’s earnings sounds cheap, bear in mind that expectations can change drastically one way or the other. 

So, my point is that the outlook for the oilfield services industry can change very quickly and often.  Therefore, more important than the earnings numbers themselves is how the company sees their next few years going.  Areas to pay particular attention to include how the company intends to expand its footprint into international markets, and the outlook for the margins over the next two years.  These are the most likely aspects of the earnings call to move the stock significantly one way or the other.


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Halliburton and Petroleo Brasileiro S.A. (ADR). The Motley Fool owns shares of Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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