Halliburton beats on earnings and makes case for 'multiyear upcycle' in oil

Published Tue, Jul 19 20222:34 PM EDTUpdated Tue, Jul 19 20222:45 PM EDT

Club stock Halliburton (HAL) reported better-than-expected earnings results for the second quarter on Tuesday morning. Even better: Management stressed the current energy market is less prone to the boom and bust cycles of the past and it expects stronger years ahead. Bottom line This was a strong quarterly release, with results across Halliburton's operations coming in stronger than expected by the Street. The combination of a renewed appreciation for energy independence by nations around the globe following Russia's invasion of Ukraine, population growth fueling rising demand and an intense focus on shareholder returns over production growth are all playing right into Halliburton's hands. Management believes these three trends will result in accelerated activity in the future. Despite those positive underlying fundamentals, we are downwardly revising our price target to $40 from $45. This reflects the recent turn in investor sentiment on the energy complex overall, along with the slight multiple contraction and downward estimate revisions on the Street as investors attempt to price in a mild economic recession. We look forward to hearing more later this evening when CEO Jeff Miller joins Jim on Tuesday's edition of "Mad Money." Companywide results Revenue of $5.07 billion in the second quarter — up 37% year over year — outpaced expectations of $4.71 billion, while adjusted earnings of 49 cents per share edged out the consensus of 45 cents per share. Additionally, adjusted operating income — which excludes impairments and other charges, including a $344 million pre-tax charge resulting from management's decision to exit Russia due to sanctions — of $718 million exceeded the $662 million sought by Wall Street analysts. Free cash outflow of $215 million was short vs. expectations of $312 million. Management's outlook The company acknowledged recent energy market volatility, but said fundamentals still strongly support a "multiyear energy upcycle." Management expects third-quarter revenue in its completion and production unit to increase mid-single digits with about 75 to 125 basis points of margin improvement. Sales from drilling and evaluation are expected to increase low-to-mid-single digits with margins being flat to up 50 basis points. On the demand side, support in management's view comes from the simple fact that oil and gas, despite efforts to move away from fossil fuels over time, remain critical to long-term economic growth. Energy security has become even more important following the pandemic and Russia's invasion of Ukraine . Meanwhile, population growth will continue to push demand higher. On the supply side, conditions remain tight and in management's view meaningful solutions "will take time" after about seven to eight years of underinvestment; spare OPEC capacity is at historic lows and the risk to Russian supplies remains high. Echoing the commentary from the first quarter's conference call, management reiterated that this recent energy cycle has been nothing like prior ones as operators have begun to focus more on investor returns and to hold off on aggressive growth investments due to ESG commitments and regulatory pressure. Due to the increased focus on returns over production growth, management implied that even an economic slowdown would not cause prices to crash as it will not solve the structural undersupply the world is facing. Of course, this benefits Halliburton as the company's services are the answer to increasing supply. Translating these dynamics into a financial outlook, management noted that international customer spending "remains on track to increase by mid-teens this year, with the Middle East and Latin America expected to grow the most on a full year basis." Moreover, additional project announcements globally gives the team reason to believe that activity will accelerate in 2023 and beyond with "multiple years of growth" ahead. Management further reiterated that as a result of the increased focus on financial returns, operators are focused "more on developing known resources and less on long-term exploration programs," a factor that bodes well for Halliburton as it means more customer spending on the drilling services in which Halliburton is an industry leader. Regarding North America, management commented that the market "remains strong, steadily growing and all but sold out," adding that the team's "strategic priority is to maximize value in North America by focusing on cash flow and returns, not market share." The company is sold out for the remainder of 2022 as well and that the industry overall "will be all but sold out for the second half of the year due to service company discipline, long lead times for new fleets and supply chain bottlenecks for consumables." In terms of customer spending, the team expects growth to "eclipse 35% this year," adding that conversations with customers have already turned to 2023 plans "well in advance of the typical timeframe," a sign of how tight equipment capacity is going forward. First-quarter sales breakdown Breaking the top line down by operating segment, Halliburton generated sales of $2.91 billion — up 42% year over year — in completion and production, exceeding expectations of $2.71 billion. In drilling and evaluation, sales of $2.16 billion — up 30% year over year — exceeded estimates of $2.01 billion. Completion and production operating income came in at $499 million vs. a $444 million estimate, while drilling and evaluation operating income came in at $286 million vs. a $276 million estimate. The drilling and evaluation operating margin expanded 2.67 percentage points year over year, but was down sequentially due to an expected seasonal decline in software sales. Management, however, noted that they believe margin here can and will return to first-quarter levels and expects every year to see improvement over the prior year. Completion and production operating margin expanded 1.66 percentage points annually to exceed 17% for the first time since 2014. On a geographic basis, Halliburton recorded sales of $2.43 billion in North America — up 55% year over year – with management commenting that activity marked higher throughout the second quarter. Internationally, sales were $2.648 billion — up 24% year over year. Activity is "accelerating in all international regions, particularly Latin America and the Middle East," the company said. (Jim Cramer's Charitable Trust is long HAL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Natural gas fracking site in New Mexico.

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