Halliburton 2Q Profit Edges Down on Higher Costs, Pricing Pressure

HOUSTON - Halliburton Co.'s second-quarter earnings slipped 0.3% as rising costs and pricing pressures masked the oil-field-services provider's revenue growth, but the company's rising international profile helped it beat Wall Street's expectations.

Halliburton is the top seller of North American hydraulic-fracturing services, which crack open deeply buried oil-and-gas-bearing rocks, including shale. But the company's margins have been pressured of late amid higher fracking costs in oil-rich areas, and declining demand for the service in natural-gas fields.

Halliburton reported a profit of $737 million, or 79 cents a share, down from $739 million, or 80 cents, a year earlier. Earnings from continuing operations were 80 cents. Revenue jumped 22% to $7.23 billion.

Analysts polled by Thomson Reuters had most recently forecast earnings of 75 cents on revenue of $6.96 billion.

In a note Monday, analysts at Tudor, Pickering, Holt, & Co. said that Halliburton's second quarter was "better than expected," and that the company was "a big outperformer," describing double-digit revenue growth in the company's three international regions as impressive. On average, Hallibuton's international revenue grew 15% from the first quarter.

Halliburton's performance follows similar beats by rivals Schlumberger Ltd. and Baker Hughes Inc. Friday. Experts were bracing for gloomy results in the face of the ongoing global-economic slowdown, but were pleasantly surprised to see growth abroad and stability at home.

"The international business overall is robust and growing. The companies are now seeing good volume growth," said Barclays analyst James West of the results. "In North America, the margin profiles are starting to stabilize."

Last month, the second-largest provider of oil-field services warned its second-quarter North America margins would be affected more than previously expected by a rise in the cost of guar. Concerns of potential shortages for the legume, whose juices are used in hydraulic fracturing, has rapidly inflated prices.

In North America, which accounts for most of Halliburton's business, revenue jumped 20%, but operating income declined 14% from the year-earlier period.

But analysts said they were expecting worse for Halliburton in North America. Mr. West wrote Monday that Halliburton's increased activity in the Gulf of Mexico offset some of its higher costs in the region.

Chief executive David Lesar said the company made a mistake when it bought a large reserve of the bean during the second quarter, anticipating that demand would continue to increase and that they would be able to pass the costs along to their customers.

But the price of guar came down and so did the price of oil, leaving Halliburton with a lot of expensive guar -- and and customers who were not pay higher prices for drilling services.

"We made the wrong decision. The result is we bought too much guar too early and paid too much for it," he said. "The impact was dramatic in the second quarter."

Though there is no more guar shortage and prices have come down, Mr. Lesar said Halliburton's costs will still be high through the third and fourth quarters as it works through its supply of overpriced guar. Mr. Lesar said increased guar costs were 75% higher in the second quarter than in the first, and he expects the guar costs will rise another 20% in the third quarter.

The company expects that its profit margins in America will get back up to normal levels as guar costs and the costs associated with moving equipment from dry natural gas fields to oil-rich plays come down. That move is a trend throughout the industry, as production companies have turned to more profitable oil basins in response to falling natural gas prices.

"We have a lot of equipment on the move right now, a lot of people on the move," Mr. Lesar said. "As the dust settles, it will let our margins get back to normal without a tremendous amount, or any ability to increase prices."

The company said its Canada rig count dropped 70% from the first quarter, due to the annual spring breakup, and its U.S. rig count decreased 1%, with activity in oil and liquid basins mostly making up for a decline in natural-gas drilling activity.

Chief financial officer Mark McCollum said the company expects the number of rigs in natural-gas fields to hit a bottom in the next few months, and for rigs to continue migrating to oil fields. Mr. Lesar cautioned that uncertainty about oil prices could make customers cautious.

Halliburton executives also highlighted the company's strong performance internationally, where Halliburton is continuing to expand its operations.


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