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Tickers in this Article: HAL, BHI, SLB, XOM, NOV, BAS, KEG
Energy may indeed be a global market, but that does not mean that industry activity levels are consistent across regions. Once again, energy services giant Halliburton (NYSE:HAL) has reported exceptional results in North America while overseas service demand seems more tepid. With the stock having nearly doubled over the past year, investors need to count on that eventual recovery in overseas activity to push margins and earnings even higher in the next year or two.

TUTORIAL: Risk and Diversification

Q2 Results Driven by the Home Markets
Halliburton is an international services company, but North America made up more than half of the company's revenue this quarter. Total company revenue rose 12% sequentially (and 35% annually), with North American revenue up 16% and international revenue up 8%. That North American result looks especially good in light of the 6% growth in rig activity.

On the margin side, the company continues to leverage higher revenue through its integrated services. EBITDA climbed 25% on a sequential basis, while operating income was 42% higher than in the first quarter (and up 52% from last year). That works out to an operating margin of 19.6% for the quarter - with 28.9% margins in North America (and incredible 50%+ incremental margins) and down at about 10.3% for the international business.

More Fluids Mean More Services in North America
By and large, wells designed to produce oil or liquids demand more service inputs than dry gas wells - with the range stretching from 1.2 to 2 times (in other words, some oil/liquids wells are twice as expensive as gas wells in terms of their service costs). While some of this is due to the greater fracturing demands of a liquids well, there is also more complex demands on fluid systems and the like. That's good news for other integrated service players like Schlumberger (NYSE:SLB) and Baker Hughes. Moreover, the relatively stronger environment in North America should be good news for the likes of Patterson - UTI (Nasdaq:PTEN) and Nabors (NYSE:NBR), as margins seem to be heading towards another peak.

Halliburton is also benefiting from the ongoing consolidation and concentration in the energy sector. Companies like Exxon Mobil (NYSE:XOM) and Marathon (NYSE:MRO) continue to buy into key basins (as witnessed by the recent BHP Billiton (NYSE:BHP) - Petrohawk (NYSE:HK) deal), and major energy companies are less inclined to deal with the mom-and-pop service operators in lieu of giants like Halliburton.

R&D Matters
Energy services does not get much respect as an industry with a meaningful R&D component, but companies like Halliburton, Schlumberger and National Oilwell Varco (NYSE:NOV) continue to show why that's a mistake. In the case of Halliburton, the company used its earnings press release to highlight a successful well project with El Paso (NYSE:EP) that used Halliburton's new CleanSuite fracturing and water treatment technology. With more and more jurisdictions taking the environment hazards of fracturing seriously, this could be a differentiating opportunity for HAL, to say nothing of fluid handling companies like Basic Energy Services (NYSE:BAS) and Key Energy (NYSE:KEG).

The Bottom Line
Looking at Halliburton's current performance and enterprise value, and the analyst estimates for next year's EBITDA, these shares are not looking nearly as cheap as many of the E&P companies it services. That said, margins in North America are great and the international business should start to improve (albeit not overnight). With Halliburton not looking overvalued by that same methodology, there could be room yet for investors who want to play one of the biggest and best-diversified names in energy services. (For related reading, check out A Guide To Investing In Oil Markets.)

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