Halliburton Earnings Preview: BP Case Overshadows Earnings

Halliburton (NYSE:HAL) will announce its Q4 results on Monday, January 23rd, completing a strong year for oilfield services firms. Strong oil prices underpinned continuing activity in onshore unconventional plays in the U.S., although voices calling for stricter regulations on the practice of hydraulic fracturing gained strength over the last few months. The fourth quarter also saw an escalation in the legal battle between BP (NYSE:BP) and Halliburton over the Gulf of Mexico incident. Halliburton supplied the cement that was used to seal the Macondo well, and BP claims that the cement played a crucial role in the disaster and is looking to recover the costs of the spill from Halliburton. Halliburton has denied these charges and holds that its contract with BP insulates it from any damages.

We have a $54 price estimate for Halliburton, which is about 40% ahead of its current stock price.

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Strengthening shale activity

Indicators of exploration and production (E&P) activity such as rig count continued to show growth in North America. High crude prices directed activity toward liquid rich plays as gas prices remained weak in Q4 because of a mild winter in the U.S. E&P activity will also get a boost with the entrance of new investors into shale exploration. Over the past few weeks, French major Total SA and a few Asian companies committed up to $8 billion to shale prospects in the U.S. These investments will help established players expand their activities. A significant portion of Halliburton’s revenues from North America come from services aimed at shale exploration such as hydraulic fracturing and directional drilling.

We also expect offshore drilling to pick up as the number of rigs in the U.S. Gulf of Mexico rose over the second half of 2012. The government also completed a lease sale in the GoM, signalling its willingness to increase domestic production of oil. All these efforts bode well for Halliburton’s future revenue growth.

E&P activity in international markets continued to remain stable as the rig count only declined marginally in December. We expect global spending on oil exploration to pick up in 2012 because of high crude prices, increased costs of drilling and the adoption of shale technology in Europe and in China.

Gulf of Mexico spill

Halliburton’s stock received a major jolt last quarter because of intensified efforts from BP to push some of the spill costs to its subcontractors. BP’s efforts received a boost when a government report named Halliburton as being partially responsible for the spill. BP also obtained a testimony from a Halliburton employee stating that the company had destroyed evidence that could be ‘misinterpreted’ and used against it in court. Halliburton has defended itself against the latest charges. The cases are expected to go on in 2012.

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