Company deals with fracking downturn
Houston oil field services company Halliburton is cutting jobs, storing hydraulic fracturing equipment and focusing on higher margin businesses as it contends with fracking slump that pummeled its earnings in the second quarter.
Halliburton is the market leader in North America, where it dominates fracking in U.S. shale fields. North America accounted for about 57 percent of its revenues in the second quarter, but a slowdown in the Permian Basin and other shale fields has undercut the demand for fracking services as oil prices hold at modest levels and pipeline shortages constrain drilling. The company’s profits plunged to $75 million in the second quarter from $511 million in the same quarter a year earlier. Revenues slipped to $5.9 billion from $6.1 billion in the second quarter of 2018.
During a Monday morning investors’ call, Halliburton CEO Jeff Miller said the company is responding to the situation by pulling unused fracking fleets from the field and not redeploying them until it can see “acceptable returns.” Halliburton also sliced its North American workforce by
8 percent during the second quarter, but did not disclose the number of jobs cut.
Halliburton has about 60,000 employees worldwide.
“(Hydraulic fracturing ) remains oversupplied and we’re not afraid to reduce our fleet size, as it contributes to righting the supply and demand imbalance,” Miller said. “This may impact our (revenues) in the near term, but saves labor and maintenance costs and I believe will lead to better margins.”
The oil field services sector is still recovering from the oil bust that ended in 2016 and led to billions of dollars in losses and thousands of job cuts. When oil prices plunged by more than 40 percent
at the end of last year, it was another set back for services companies that were just beginning to regain pricing power after years of giving steep discounts to their customers, exploration and production companies. Although prices have recovered to about $56 a barrel from a December low of about $43, oil and gas companies have tightened their spending.
Takes a licking
oil field services stocks have taken a beating in recent years. Halliburton’s stock market value of $20.4 billion, for example, is roughly one-third the $60.4 billion during the second quarter of 2014, the peak of the last oil boom. Industry analysts view Miller’s response to the North American hydraulic fracturing slump as at strategic shift that
could improve returns for stockholders.
Part of Halliburton’s new strategy is spending less of the company’s capital budget on hydraulic fracturing and more on business lines with higher rates of returns such as drilling tools and wireline, which uses cable to lower sensors, equipment and explosives into wells, said Byron Pope, an analyst at the Houston investment bank Tudor, Pickering, Holt & Co.
“Historically, their game plan was one where they would take more market share from smaller competitors,” Pope said. “Today, they announced that they are going after higher returns.”
Halliburton stock jumped 9 percent, or $1.99, to close Monday at $23.74 a share. Halliburton shares were trading above $40 a year ago. The company did not
disclose how many hydraulic fracturing fleets it is taking out of the field. Industry analysts estimate that services companies have a combined 350 active fracking fleets with 15 million of horsepower currently deployed in shale basins across North America.
James West, an oil field services analyst for the global investment firm Evercore ISI, wrote in a research note that Halliburton is turning down unprofitable work in North America in favor of higher-paying jobs overseas. Halliburton’s rival Schlumberger, the world’s largest oil field services company, has fared better than Halliburton because about twothirds of its business is outside of North America. Schlumberger’s North American revenues fell 11 percent in the second quarter from the prior year, but the company nonetheless earned $492 million in profits.
Wide world
With foreign crude oil commanding at least $5 per barrel more than West Texas Intermediate and international customers signing longer-term contracts, West and other analysts believe that overseas oil and gas development will experience high singledigit growth in 2019 and doubledigit growth in 2020.
“It is clear that the strategic actions and substantial investments the company has taken to grow its international footprint, manufacturing capacity and physical presence in various geographies leave it well positioned for the international recovery,” West said in a note to investors.