Global oilfield services firm Halliburton (NYSE: HAL) announced results that severely missed expectations.
Revenue came in at $5.19 billion, 1% ahead of consensus of $5.15 billion, but an earnings per share loss ($1.88) missed the consensus estimate of $0.29 by 350%.
The earnings miss was driven by a ~$2.2 billion write-off in the U.S. business as drillers continue to cut activity and pricing falls.
If we back out the write-off, earnings of $0.31 beat consensus by 7%.
Full-year revenues was down 7% compared to 16% growth in 2018 over 2017, demonstrating a tough environment for oil and gas companies.
The market may bid up the stock on this earning “beat” but in the medium term, there is not much to get excited about with flat oil prices and belt-tightening among many customers.
Even still results were disappointing, revenue in the U.S. fell 30% compared to a U.S. rig count that declined only 5% in the fourth quarter.
Weak pricing obviously continued in the U.S. as oil producers pull back on activity in key shale basins to rationalize spending.
Even though the analyst community likes to back out every write-off and call it one time, impairments like Halliburton saw this quarter are why this sector has trouble earnings its cost of capital over time.
The write-off may have been one time but looking through history we can see it has certainly not been a one-off with regular write-offs during periods of contraction and falling oil prices.
U.S. Oil Rig Count Decline Continued in the Fourth Quarter
Source: Baker Hughes
Regional Performance
In the fourth quarter, North America was the worst-performing region for the company, down 30% on a year over year basis.
International revenue increased 12% driven by strength/weakness in Europe/Africa/CIS and Middle East/Asia.
The international market continues to rebound from the 2016 oil selloff.
North America continued to see weak results from a pullback in rig count and a fall in pricing and shale activity.
Energy Off to a Tough Start in 2020
So far this year, oilfield service stocks and energy stocks in general, are underperforming the broader market as stock prices cool off after international tensions between Iran and the U.S. caused oil prices to spike temporarily.
Halliburton stock is down 2% this year while competitors Schlumberger and Baker Hughes are down about 4.5% and 8% respectively. U.S. equipment provider National Oilwell Varco is down more than 7%.
This compares to the S&P 500 which is up 1% for the year.
Halliburton continues to face greater headwinds than peer Schlumberger due to a reliance on U.S. shale drillers who are pulling back on drilling rigs as a result of falling oil prices and dwindling cash flows.
Halliburton’s revenue growth has been falling with oil prices and rig activity over the last year.
Halliburton’s multiple premia to peers fell in the last six months but has been on the rebound lately and remains flat with a year ago.
The problem all these companies face is that revenue growth is slowing, dragging stock prices down with it.
After 12 years of investing in oil and gas markets professionally, our advice is to avoid these stocks until the oil price is rebounding in the early days of an economic recovery.
All other times, this sector is going to underperform long term growth stories in technology where your money should really be invested.
HAL Revenue Decline Worst in the Group but Pricing vs Peers is Holding Up.
Source: YCharts
Ongoing geopolitical strife has not had a meaningful positive impact on oil prices yet, likely due to the significant excess capacity of OPEC.
Halliburton is always the golden child when U.S. shale activity is hot, but when shale pulls back, like it is today, Halliburton is the ugly duckling.
We think investors would be better served investing in tech names instead of an oil industry that has failed to generate meaningful gains for investors for far too long.
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