Here's a breakdown of Halliburton's earnings after we added shares earlier

Published Tue, Apr 19 202212:55 PM EDTUpdated Tue, Apr 19 20226:44 PM EDT

Club stock Halliburton (HAL) on Tuesday morning reported better-than-expected earnings results for the first quarter as tightness across the entire energy complex in North America and elevated commodity prices supported demand. Bottom Line The before-the-bell results serve to bolster our view that producers will need to spend heavily, and to Halliburton's benefit, to increase production capacity. In addition to significant revenue growth in North America, we saw sales growth across all major international regions. Looking ahead, management believes the strength we saw this quarter should sustain as a "multi-year upcycle is well underway." Moreover, a pivot from long-cycle to short-cycle investments is proving supportive of commodity prices and bodes well for Halliburton. As noted in our HAL buy-alert earlier, we talked about the reasons behind Tuesday's early morning weakness in the stock, which subsequently turned higher and then lower again. Pre-tax charge related to the Russia-Ukraine conflict Lighter than expected Completion and Production operating margin Free cash outflow versus expectations for an inflow Expectations as Halliburton has been one of the great stocks this year in an overall terrible market. That said, the commentary on the release and the earnings call points to material improvements ahead on all of these fronts — aside from Russia-Ukraine which is small piece of the operation. As a result, we're raising our HAL price target to $45, representing roughly 18.4x fiscal year 2023 current earnings expectations. We believe estimates will be revised higher following this release — meaning our target price likely implies a lower valuation than it appears. Also, the pivot to shorter-cycle investments by customers and the structural risk of undersupply this brings, warrants a slightly higher multiple than we have seen in past years. Companywide results Revenue of $4.284 billion in the first quarter — up 24% year over year — outpaced expectations of $4.193 billion while adjusted earnings of $0.35 per share edged out the $0.34 consensus. Additionally, operating income of $511 million came up short versus estimates of $541 million. Free cash outflow of $183 million versus an estimated $229 million inflow was due largely to a working capital build. Before going further, we want to touch on some of the those impairment and other charges taken out of Q1 adjusted EPS. During the quarter, Halliburton recorded a pre-tax charge of $22 million due to a write down of all assets in Ukraine as a result of the ongoing conflict. On the call, CEO Jeff Miller said, "In compliance with sanctions and consistent with our strategy for profitable international growth, we announced that we would begin steps toward a wind-down of our Russian operations and we remain active in that process. Russia accounts for about 2% of our business. Sanctions and export compliance impact everyone in the Oil Field and operations and supply chains in Russia are at-best challenged. The situation is far too early and evolving to say more." In a termination of debt, Halliburton redeemed $600 million worth of senior note due November 2025, which led to a $42 million hit to the bottom line. Outlook Regarding the current operating environment and path ahead, management commented on the call that they expect demand to grow in the near and mid-term on the back of "economic expansion, energy security concerns, and population growth." Compounding the demand side dynamics, the team called out that "supply remains under structural threat of scarcity." While the war in Ukraine hasn't helped things, they said "fundamental supply tightness existed before this geopolitical conflict." Speaking to some of the structural issues supporting commodity prices, management added that an increased desire to maintain investment flexibility has led to companies prioritizing shorter-cycle investments for at least the near- to mid-term. Short-cycle investments allow management teams to more quickly react to commodity price swings. Longer-cycle investments have an extended time horizon and large upfront costs that tend to result in market oversupply that weighs on commodity prices. According to the team, this shorter-cycle focus also means that when investment stops, production at best doesn't grow and in some cases declines rapidly resulting in "a perpetual threat of undersupply that is supportive to commodity price." Management believes this pivot "is great for Halliburton and sets up fantastic conditions for [the company] to outperform." Domestically, management increased their customer spending forecast to "over 35%" growth for the year, up from the 25% figure provided on the prior quarter's earnings call. Internationally, management sees customer spending increasing by "mid-teens" this year thanks to the strong start seen in the first quarter, a 50% year-over-year increase in the company's completion tool order book. Those are orders that are generally delivered — and therefore revenue realized — in the current year. Management cited a "strong pipeline of new projects scheduled to start in the second-half of this year, particularly in the Middle East." The team also expects international activity to not only gain momentum in the second quarter led by the Mideast and Latin America but accelerate even further in the back half of the year. Q1 Revenue breakdown Breaking the topline down by operating segment, Halliburton generated sales of $2.353 billion — up 26% year over year — in Completion and Production, a hair short versus the $2.362 billion the Street was looking for. However, Drilling and Evaluation made up for it, where sales of $1.931 billion — up 22% year over year — exceeded estimates of $1.842 billion. On the margin front, the dynamic was similar as Completion and Production operating income came in at $296 million versus a $349 million estimates while Drilling and Evaluation operating income came in at $294 million versus a $251 million estimate. Notably, the profit margin in Drilling and Evaluation expanded 4.4 percentage points year over year to exceed the 15% level for the first time since 2010. Meanwhile, the Completion and Production margin came up short, as noted above, management sees this improving as they work through this investment cycle. On a geographic basis, Halliburton recorded sales of $1.925 billion in North America — up 37% year over year. Internationally, sales were $2.359 billion — up 15% year over year. "Strong growth in Latin America and the Middle East Asia offset the winter weather impacts in Europe," management said. Breaking the international results down one step further, sales were up 22% year over year in Latin America, 7% in Europe/Africa/Commonwealth of Independent States, and 17% year over year in Middle East/Asia. In addition to the growth seen in international market, management noted on the call that the rate of activity is accelerating across all international markets. (Jim Cramer's Charitable Trust is long HAL. See here for a full list of the stocks.) Correction: This story has been updated to reflect that Halliburton took a $42 million hit to the bottom line due to debt termination. 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Signage is displayed outside a Halliburton Co. location in Port Fourchon, Louisiana, U.S.

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