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Morningstar | HAL Updated Forecasts and Estimates from 01 Apr 2019

Halliburton's fourth-quarter results were slightly down, owing to industry headwinds affecting the company's North American pressure-pumping business. Revenue declined 4% sequentially, owing to an 11% drop in North America, offset by strong 7% growth in international markets (driven chiefly by year-end product and software sales). Adjusted operating margins slipped sequentially to 10.2% from 11.6%. Our fair value estimate and narrow-moat rating are unchanged.

The completion and production segment saw the biggest hit, as pressure pumping accounts for about 50% of that segment's revenue. Other North American businesses that are exposed to the same issues as pressure pumping compose another 25% of the segment's revenue. Sequentially, segment revenue fell 8% and adjusted operating margins fell about 180 basis points. Moreover, management is guiding for another 5%-10% revenue drop and a 300-400-basis-point margin degradation in the first quarter of 2019.

As we've previously noted, the bottleneck in Permian Basin takeaway capacity has caused a slowdown in U.S. shale completions activity, affecting utilization and pricing for pressure pumpers. This completions slowdown accelerated in the fourth quarter. However, the takeaway constraints are still set to be alleviated by the second half of 2019, meaning that these issues are largely temporary.

Somewhat more worrisome than the temporary issues affecting pressure pumping, the company has noted that many low-priced contracts in the drilling and evaluation segment awarded in 2018 (in a bid to gain market share) are having a deleterious effect on margins. Management guided for segment margins being down 100-150 basis points in the first quarter of 2019 (despite rising industry activity levels generally). Management also declined to offer guidance on when segment margins would begin increasing, merely stating that it would take time for the company to consolidate its share wins and then shift its strategy to obtaining better pricing.

We prefer Schlumberger's differentiated focus on integrated drilling and other services contracts for international markets versus Halliburton's approach. Still, we think Halliburton (and other international services providers) will benefit in coming years as international activity and expenditure rebounds from current trough levels, which should be accompanied by broad pricing improvement.