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Morningstar | Halliburton's Second-Quarter Bottom Line Surprises to the Upside

Halliburton reported a surprisingly strong second quarter. On the one hand, the top-line results fell in line with our expectations and overall market trends. Revenue increased 3% sequentially with North America up 2% and international revenue up 6% (roughly in line with peer Schlumberger). On the other hand, bottom-line results beat expectations, with adjusted earnings of $0.35 per share beating consensus of about $0.30. Adjusted operating margins improved sequentially to 9.3% from 7.4%, driven chiefly by a 240-basis-point improvement in the Completion and Production segment. Our fair value estimate and narrow moat rating are unchanged for now.

The Completion segment improvement was mostly driven by strong activity increases in international markets. In contrast to the prior quarter, international pricing was not a headwind, and management noted that leading edge pricing was moving higher overall. In North America, the segment's key pressure pumping business saw modest increases in activity (owing to an industry rebound). However, management downplayed the contribution from pressure pumping improvement and instead highlighted product lines like cementing and artificial lift. This focus away from pressure pumping was echoed in discussing the company's longer-term investment plans. We think management has wisely moved closer to our long-held view that investments in the fiercely competitive pressure pumping market should be treated with extreme caution.

In the Drilling and Evaluation segment, revenue was up 2% sequentially and operating margins increased to 6.8% from 5.9%. Margins remain still much weaker than the 2018 average of 9.3%. However, management is still guiding that 2019 overall will be "in the ballpark" of 2018 levels. This would imply a sharp uplift in the second half of 2019, due to the end of project startup costs, continued activity increases, and perhaps improved pricing.