Halliburton Cancels Christmas But Goes All-In on New Year

(Bloomberg Opinion) -- In the great war at the top of the oilfield services business, one side now says it will all be over by Christmas (more or less). After Schlumberger Ltd.’s heavily hedged guidance on Friday, Halliburton Co. used Monday morning to put down a definitive marker. It needs one.

Having cut earnings guidance twice this summer, Halliburton did so again with the release of third-quarter results. Earnings per share in the current quarter are now expected to be 37 to 40 cents a share, roughly half of what was forecast in early July, before the resets began. The culprit is the North American fracking market, the biggest driver of Halliburton’s business (as opposed to Schlumberger’s more international mix). Logistical bottlenecks in the Permian basin and investor demands for exploration and production companies to actually make money have slowed shale’s roll. The big question is when growth resumes. And now Halliburton has given a clear answer: This quarter marks the bottom.

Halliburton reasons that, once E&P firms get past the holidays, they will have four compelling reasons to get back to work. First, they’ll have new annual budgets locked and loaded. Second, those budgets will have been reset — either explicitly or implicitly — at higher price decks. The median forecast for West Texas Intermediate crude oil in 2019 is $69 and change per barrel. That’s $17, or almost a third, higher than where forecasts for 2018 were this time last year. Meanwhile, natural gas prices may spike temporarily this winter amid tight inventory. Third, drilling has remained relatively robust, leading to a large backlog of wells waiting to be fracked and thereby start production. And fourth, new pipelines to ease bottlenecks in the Permian basin — where the backlog of uncompleted wells has surged — should be less than 12 months away.

The logic is sound enough. But this being the oil business, logic can have a short shelf life, as Halliburton’s quick succession of cuts this summer, and on Monday, unhelpfully illustrated. With that in mind, it is interesting that CEO Jeffrey Miller decided to be so definitive on timing the bottom of the cycle.

He may have felt he had to after his rival’s comments on Friday. The gap between Schlumberger and Halliburton on the prospects for U.S. tight oil is growing ever wider. Schlumberger, in particular, sees structural constraints on growth building as shale basins mature. This is a potential problem for both companies, but more so for Halliburton.

Halliburton can draw some comfort from the fact that its stock was down by only about 2.5 percent Monday morning, despite having reset guidance lower again (the whole sector was down 1.5 percent on lower oil prices). In part, that may reflect the results themselves. The company did manage to beat (reduced) forecasts for the third quarter. Notably, it clocked up its sixth straight quarter of positive free cash flow, Halliburton’s longest run on this important metric in at least a decade, according to figures compiled by Bloomberg.

Most of all, though, investors seem to be buying Miller’s certainty on the cycle. For Halliburton’s sake, that certainty had better prove warranted, or the backlash next spring will be ugly.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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