EIA Report Echoes Halliburton's Optimistic View of Oil Inventory Declines

The company has hope the commodity environment will improve as oil inventories decrease and service providers and U.S. producers' positive will close the gap on service pricing.
By Tom Terrarosa ,

Leading into Halliburton's (HAL) - Get Report second quarter earnings report Wednesday, Buy-side analysts consistently opined the Houston oilfield services provider has the greatest view of the North American oil and gas landscape and will be best positioned to reap the benefits of a cyclical recovery in the market. 

And not surprisingly, that is exactly the sentiment company management relayed Wednesday morning in both the earnings report and the following conference call with analysts. 

On the call Wednesday morning, management said it expects to reach break-even in the North American space by the first quarter of 2017, and CEO chairman and CEO Dave Lesar went so far as to say this past quarter will be the trough of Halliburton's earnings. 

The reason for Halliburton's optimism despite commodity prices sinking to two month lows Wednesday: U.S. producer's positive sentiment trumps temporary volatility in oil prices. 

Moreover, management expects global inventories to sink and a modest uptick in active rigs starting in the second half of 2016, regardless of the fact that U.S. benchmark West Texas Intermediate crude futures have not seen the critical $50 per barrel price mark in nearly a month. 

Coinciding with Halliburton's optimistic view of the space, oil prices were propped up Wednesday morning, as the U.S. Energy Information Administration reported U.S. commercial crude oil inventories had declined by 2.3 million barrels from the previous week to 519.5 million barrels total. While this is the ninth consecutive decline in U.S. crude inventories, the EIA noted stockpiles remain historically high for this time of the year. 

The decline supports Halliburton's view that oil inventories will be forced down and commodity prices could rise in the upcoming quarters. And as commodities climb, the company expects pressure on its balance sheet from persistent pricing headwinds to subside. 

But the company refused to talk shop over its services pricing strategy, a key point for several analysts on its call Wednesday, and said only that negotiations to this point have been a "barroom brawl." Halliburton was confident, however, that oil and gas producers and service and equipment providers will close the gap on pricing in the coming quarters, as the operators know they need a viable service industry. 

Halliburton reported better-than-expected second quarter earnings results Wednesday after excluding tax-deductible special items such as its $3.5 billion merger break-up fee paid to Baker Hughes (BHI) .

The company recorded an adjusted EPS loss of 14 cents on revenues of $3.84 billion, with North America seeing a 15% revenue decline and an operating loss of $124 million. 

Analysts took the beat and Halliburton's optimism positively Wednesday, believing their outlook is a good sign for operators across the North American space.

Investors were not relieved, however, as the company's shares were down about 1.8% to $44.22 apiece around 11:45 a.m. EDT. This could be because Halliburton's EPS beat was driven not by operations but by tax expenses and other non-operating expenses, which both contributed 2 cents per share to earnings, according to Seaport Global analysts. 

Industry followers will surely look to Halliburton's larger peer Schlumberger (SLB) - Get Report on Friday for further guidance on the sector. 

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