Halliburton 3Q Profit Off 12% Amid Pressures at N. American Segment

HOUSTON - Halliburton Co.'s third-quarter earnings fell 12% as reduced drilling activity in North America and rising costs for materials used in hydraulic fracturing squeezed the oil-field service provider's profits.

Houston-based Halliburton reported a profit of $602 million, or 65 cents a share, down from $683 million, or 74 cents a share, a year earlier. Excluding acquisition-related charges, litigation settlements and other items, adjusted earnings from continuing operations were 67 cents, in line with Wall Street expectations. Revenue increased 8.6% to $7.11 billion.

Halliburton is the first big oil-services company to report results for the third quarter, a period that saw many oil and gas production companies slowing down drilling activity in order to keep costs down and stick to 2012 budgets amid volatile energy prices. Weather-related disruptions such as Hurricane Isaac, which struck the U.S. Gulf Coast in August, also impacted oil-field operations and Halliburton's bottom line. Rivals Schlumberger Ltd. and Baker Hughes Inc. are set to report Friday.

Analysts said the drop in net income did not come as a surprise--Halliburton and a handful of other services companies had indicated that revenues and margins would be lower than initially expected in the third quarter.

"There was not a lot of sticker shock," said Raymond James analyst Collin Gerry. The main question remaining is "how much further can North America go down as far as profitability?"

Halliburton is the top seller of services for hydraulic fracturing in North America. Hydraulic fracturing, a process also known as fracking, consists of injecting a mix of water, chemicals and sand at high pressure into deeply buried oil- and gas-bearing shale rock formations to crack them open. But the company's margins have been pressured lately amid higher fracking costs in oil-rich areas and declining demand for services in natural-gas fields.

Chairman and Chief Executive David Lesar said Wednesday that Halliburton is "seeing activity reductions by some of our customers as they continue to moderate activity to operate within their stated 2012 budgets."

Mr. Lesar said the next few quarters could be "bumpy" in North America, but he expects activity to pick up again next year based on conversations with customers that have indicated they want to do more and run more rigs once new budgets are in place.

Barclays analyst James West wrote in a note Wednesday that Halliburton's North American results were "modestly" below expectations, but that the environment is likely "troughing."

"We expect North America to begin to rebound" as oil and gas companies reload their budgets for 2013, he wrote.

Halliburton's revenue of $7.1 billion was down 2% from the second quarter, driven by a 5% decline in North American revenue. The company earns more than half its revenue in North America.

In the mean time, Mr. Lesar said Halliburton won't chase after low-priced work in order to keep crews busy or gain market share--a change in strategy for the company.

"We believe these issues are transitory, and we do not want to take the risk of lowering the pricing baseline for a problem that we will expect to go away in a couple of quarters, or to have our customers believe that such pricing would be the new normal going forward," he said.

Halliburton's international results were mixed, with revenue from international operations up 2% from the second quarter, driven by growth in Latin America and the Middle East that was partially offset by declines in Europe.

Halliburton said it expects international margins to improve gradually as the company ramps up activity on new projects, increases prices on some contracts and improves results in new markets.

In the completion and production business, revenue was up 6.7%. However, operating income dropped 45%, including a decline of 60% in its North American segment.

In the drilling and evaluation business, revenue was up 12% and operating income was up 17%.


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