Analysts and investors will dig through
fourth-quarter earnings report today not so much to see what happened but to find clues about what will happen next.
The Dallas-based oil-services company warned last month it wouldn't meet analysts' fourth-quarter earnings expectations, saying it would take a $24 million charge to lay off 2,750 workers. Halliburton said fourth-quarter earnings after the charge would amount to 14 to 16 cents a diluted share, down sharply from 58 cents a share a year earlier and far short of
consensus estimate at the time of 36 cents. (The consensus dropped to 20 cents after the Dec. 28 press release.)
So now most observers expect the bad news is out. Instead, analysts and investors will look to the earnings release for guidance on the future. And the tired refrain for the oil-services industry is that future earnings hinge on the fortunes of oil producers, which in turn look to crude-oil prices to determine spending levels.
Investors are well aware of the oil-services industry's pricing problems and the declines in worldwide rig activity, says Cary Robinson, an analyst at Halliburton shareholder
American Express Financial
in Minneapolis: "What they don't know is what will happen going forward in terms of the business."
Investors took a comment Thursday by Eaun Baird,
chairman, as bullish, Robinson says, and sent the company's shares up 3.2%. In an earnings
release, Baird said he saw higher crude demand from Asia leading to higher oil prices and increased oilfield service activity by early 2000.
But for now, oil-services companies are focusing on cutting costs.
Bill Herbert, head of oil-services research at investment bank
Howard Weil Labouisse & Friedrichs
in Houston, expects that Halliburton executives will talk about managing the company's cash and focusing on revenue per employee. In short, they'll talk about cutting workers, which could keep revenue per employee at least flat as actual revenue falls. (Howard Weil hasn't performed underwriting for Halliburton.) Halliburton already has announced layoffs totaling nearly 11,000 workers, or about 11% of its workforce, for reasons including depressed oil prices and the need to consolidate recent acquisition
Service companies are now much more willing to cut their workforces in an attempt to maintain profitability than they have during past crude-price slides, says Jim Wicklund, who follows the sector at
Dain Rauscher Wessels
in Dallas. Dain has not done any underwriting for Halliburton.
Halliburton already has acknowledged that its projection of 10% to 15% earnings growth over the next two years was too aggressive, Herbert says. Oil company spending cuts will basically shut down the upstream oil sector, which finds and lifts oil and gas from the ground, he explains. He estimates Halliburton will earn $1.25 in 1999, 20 cents below the consensus estimate of $1.45. The 1998 consensus estimate is $1.65.
"I'm expecting a contraction in earnings across the board for oil service companies," he says. Halliburton will feel it especially in its energy-services unit, which includes services such as pressure pumping, well completion systems, drilling fluid systems and well-logging systems.
But he is confident Halliburton is on track to meet its goal of saving $250 million a year after its combination with Dresser, which closed in September.
Meanwhile, the fourth quarter will include an after-tax charge of $24 million, or 5 cents per share, on the job cuts, and about $60 million in losses from international projects.
Losses at Halliburton's
Kellogg-Brown & Root
unit, part of its engineering-and-construction division, worry some analysts. Engineering and construction accounted for 32% of total revenue for 1998's first nine months, and Brown & Root accounts for the lion's share of the division's profit. Losses in the fourth quarter and a continuing price squeeze may spell trouble for margin improvement in future quarters.