Halliburton - A Closer Look At Second Quarter 2012 Earnings

By Eric Fox | July 30, 2012 AAA

Halliburton (NYSE:HAL) experienced increased pricing pressure in its North American production enhancement business during the second quarter of 2012 as customers took advantage of the current supply demand balance in this oil services business line. The company also expects customers in North America to be cautious for the rest of the year due to the recent weakness in crude oil and natural gas liquids prices.

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Hydraulic Fracturing
Halliburton noted that pricing pressure for hydraulic fracturing services has increased in North America as contracts are renewed in areas where customers are developing properties that produce crude oil and natural gas liquids.

It did have some good news to report to investors focused on conditions in North America. The company said that hydraulic fracturing pricing in dry gas basin has stabilized as many of its competitors have shifted capacity out of these areas. Halliburton also reported stable pricing in its other oil service lines in North America.

It estimates that normalized margins in North America can get to the mid 20% range once conditions stabilize, and indicated that this would occur in 2013. The company reported an operating margin of 21% in North America in the second quarter of 2012.

SEE: A Guide To Investing In Oil Markets

Guar
Halliburton also suffered from higher costs for guar, an additive used in drilling fluid, with a 75% sequential cost increase in the second quarter of 2012. The company built up a high priced inventory of this raw material and expects to see a 25% increase in the third quarter of 2012 as this high cost inventory is deployed.

Other companies have also reported issues with this additive. Ashland (NYSE:ASH) uses guar in some of its product lines and reported strong interest from its customers for substitutes due to the volatile price.

Competitors
Weatherford International (NYSE:WFT) reported operating margins of 16% in North America in the second quarter. The company said that Pressure Pumping services accounted for only 9% of EBIT during the second quarter, and Weatherford International sees limited downside in this product line. Weatherford International is optimistic on the Artificial Lift business in North America, which accounted for 33% of its EBIT in the most recent quarter.

Baker Hughes (NYSE:BHI) reported North American operating margins of 13.4% in the second quarter of 2012. The company reported that hydraulic fracturing pricing was "very competitive" in the dry gas basins and the Eagle Ford Shale. It expects this pricing pressure to continue in the third quarter of 2012.

North American Operators
Several exploration and production companies reported lower pricing for oil services in the second quarter of 2012. Newfield Exploration Company (NYSE:NFX) is active in the Williston Basin and deferred some activity here due to rising costs in 2011. The company has seen a change here recently and reported that "service costs are certainly moving in a favorable direction for us to date."

SEE: Oil And Gas Industry Primer

The Bottom Line
The worm has turned for oil service operators as pricing pressure and competitive market conditions in hydraulic fracturing continues to impact the industry. Investors need to assess whether this weakness will spread to other product lines in North America and threaten the overall cycle.

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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