Halliburton Set to Kick Off Ugly Earnings Season For Oilfield Services
It may seem a distant memory, the day the $38 billion merger deal between Halliburton (HAL) - Get Reportand Baker Hughes (BHI) , which some believed doomed from the start, was called off, leaving oilfield services giant Halliburton picking up the check on a $3.5 billion break-up fee.
But the one time write-off, which surely put a dent in Halliburton's coffers, actually was revealed just 11 weeks ago, right in the heart of a second quarter filled with global energy sector uncertainty despite rising commodity prices.
And if matters weren't bad enough already, Halliburton delivered another blow to investors' confidence in an improving world in May when the company decided it would pull back activity in Venezuela, as its largest customer had not been paying its bills on time to Halliburton or industry leading competitor Schlumberger (SLB) - Get Report.
Add in a dividend that has remained flat at 18 cents for the past six quarters and continued uncertainty over whether oil prices will fall again or rise from their current mark just above $45 per barrel to the $60 target industry followers suspect operators need to really ramp up activity, and you have an investor base waiting to lean on every word coming from Halliburton on Wednesday.
Halliburton reports second quarter earnings Wednesday morning, followed by Schlumberger and Baker Hughes on July 22 and July 28, respectively, and industry followers may look to the big three to determine the degree to which first quarter troubles carried over to the second frame. More importantly though, they hope to ascertain whether those tribulations will persist into the back end of 2016.
So far, the outlook isn't promising by industry followers' measurement, with Tudor, Pickering, Holt analysts, among others, calling for an "ugly" oilfield services earnings season and some industry watchers seeing ample evidence, including persisting pricing headwinds, that tough times still lie ahead for the space.
With Halliburton first to report this week, industry followers are hoping to garner more than an earnings beat on Wednesday. Analysts, who on consensus have the Houston company losing 20 cents per share for the period on $3.8 billion in sales, see Halliburton as their best bet at better understanding the state of competition in the North American space.
GMP Securities analyst Brian Uhlmer told TheStreet via phone Monday that Halliburton is by far the player with the greatest visibility into the North American competitive space, including who's left, what equipment remains, who's competing the hardest and where the opportunities are going to be.
"I think the big category of discussion is the state of competition in North America---worldwide of course---but most specifically North America," he said. "The equipment attrition, the companies teetering on the brink of closure, these will benefit Halliburton and the other survivors."
But even so, Uhlmer expects a "terrible" earnings report and outlook Wednesday from the world's second largest oilfield equipment and services provider and the majority of players in the space.
Indeed, Baker Hughes' prospects appear nearly as disheartening despite its ability to buy back $1.5 billion in shares and pay down $1 billion in debt in the quarter thanks to Halliburton's break-up fee. On consensus, analysts are calling for an earnings loss of 6 cents per share on revenues of $2.3 billion.
And while analysts are calling for Schlumberger to report second quarter earnings per share of 21 cents on revenue of $7.1 billion on Friday, investors should note that SLB recorded EPS of 88 cents on revenues of $9 billion in the same period a year ago, representing a 21% decline in sales.
From Schlumberger, investors need to see evidence that the demand for services or equipment by major customers in the North American space is improving or set to improve this year, as Seaport Global analysts pointed out this month that SLB continues to see pricing pressure across almost all of its product lines despite North American customers' talk of increase spending in the second half.
With such poor performance across the space to date, and continued debate as to where oil prices may be going near-term, the conversation lately among industry followers seems to gear less toward definitive guidance on who's the best pick and more toward explanation of which among the big three is the lesser evil.
Heading into this week's earnings, opinions have varied somewhat. On Tuesday, Societe Generale analysts cut their rating of Halliburton to Hold, while upgrading Schlumberger to a Buy.
Meanwhile, Seaport Global analysts lowered their 2016 and 2017 EPS estimates for Schlumberger earlier this month, citing weak second quarter activity in North America, including a 10% decline in production revenues, which the firm said is mostly from North America.
Jefferies analysts took a more positive view of the space this month, upgrading Baker Hughes to a Hold from Underperform and adding Halliburton to the firm's "Franchise Pick" list under the thesis that HAL is "poised to benefit from its leading U.S. completions position, cost savings initiative and a more limited competitive landscape outside of North America."
RBC Capital Markets analysts concurred in a July 15 note, writing the firm believes the Street is underestimating the magnitude of the North American space recovery, giving its top picks nod to Halliburton and Schlumberger.
Of the big three, investors continue to be most weary of BHI's identity and financial health since being left at the alter, evidenced by the stock's poor performance compared to its peers. BHI was up 1.5% year-to-date as of Monday's close, while HAL was up 34% and SLB was up 14%.
Tudor analysts, who name Baker Hughes as one of their top oilfield services picks, believe the stock's under-performance is unwarranted, however, as the firm likes the early groundwork the company is laying out for a new, long-term go-to-market strategy.
And this week the debate is sure to continue, with the next needle-moving event being Halliburton's earnings report Wednesday morning. And as analysts admit BHI and SLB may trade on the news of HAL's earnings, investors following the top three stocks in the space may want to tune in to the latter's conference call 8 a.m. EDT.
- Claire Poole contributed to this story.
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