Halliburton (NYSE: HAL) is a top three provider of support services for early stage energy production with revenues, for the first quarter of 2010, of $3.8B and 2009 total revenues of $14.7B and operating income of $1.99B. Its primary business is to help oil exploration and drilling companies extract more oil from the ground. To that end, the company acts as a consultant, helps to optimize production. Halliburton also provides equipment and services to aid companies in evaluating new drilling opportunities, as well as cementing services post-drilling.
Halliburton has extensive market coverage in over 70 countries. As a result of its broad international exposure, Halliburton is particularly vulnerable to geopolitical instability. In other words acts of terrorism, regime changes and other disruptive acts can negatively impact Halliburton's businesses. Conversely, the company is still incorporated in the U.S., generating approximately 39% of its revenue from this country in 2009. This keeps it extremely sensitive to downturns in the US economy as well as changes to US environmental legislation.
Going forward Halliburton is expected to benefit from higher oil prices driven in part by sustained demand from China and India. Higher oil prices translate into more drilling. For instance, deep water drilling, which might normally be considered prohibitively expensive, becomes economically feasible when oil prices are high enough. Additionally, since 70% of the world's oil comes from mature reservoirs, optimizing production to squeeze every last drop of oil out of a well becomes increasingly important over time.
The company also benefited from the spin off of its KBR unit in April of 2007. KBR performed much of the contracting work in Iraq that was the subject of negative publicity and government investigations. In addition to garnering negative press for the company, KBR generated only 5% margins. Haliburton's overall margins are closer to 25%.
Halliburton was founded in 1919 and has since become a leader in oilfield services, engineering and construction. The majority of their customer companies are in the oil & gas, industrial, and government markets. Before the recent spin-off of KBR, their engineering and construction segment, Halliburton’s oilfield services segment and KBR attributed equal shares to the revenue of the company. However, KBR accounted for much less then a third of profits. Low profitability was one of the primary reasons Halliburton chose to spin off KBR. Today, the vast majority of Halliburton’s profits and revenues come from oilfield services. Halliburton focuses on profitability with less emphasis on amount of sales, i.e. higher margins (20-32%) and less market share.
First Quarter 2010 Summary
Halliburton reported 1Q earnings on April 22, 2010. Consolidated revenue was $3.8 billion, down 4% as compared to the same period in 2009, and net income was $207 million, down 46% as compared to the same period in 2009. Revenue outside North America was down 7.5% as compared to the same period in 2009. These overall declines were attributed to the global recession, which resulted in decreased customer demand and spending, lower business activity, and lower pricing and margins. Revenue in North America, on the other hand, increased by 1.2% in the first quarter of 2010, year over year, while operating profit for the region remained the same at $230 million. This is due to increased drilling activity and pricing improvement in the region.
Fourth Quarter 2009 Summary
For the fourth quarter of 2009 Halliburton posted net income of $243 million which was down 48.1% in a year over year comparison from $468 million. Similarly net income for the fiscal year 2009 came in at $1.15 billion which was down 48.5% year over year from $2.2 billion. The drop can be attributed to pricing declining and softer demand in North America for the fiscal year as well as a slow down in natural gas drilling in Mexico.  As of March 15, 2010, Halliburton along with several other oil industry support companies such as Schlumberger and Weatherford International bid on a contract to drill and provide support for the Khafji oil field which both Saudi Arabia and Kuwait share. The approximately 151 oil wells that are in the field produce roughly 500,000 barrels per day, although Saudi Arabia and Kuwait would like to raise this number to 700-900,000 by the year 2030. The contract is estimated to be worth 300 million dollars, and was previously held by Schlumberger before it is set to expire in May of this year 
Third Quarter 2009 Summary
Consolidated revenue for the third quarter of 2009 was $3.6 billion, up 3% as compared to the previous quarter. Net income was $262 million down 61% as compared to the same period in 2008. Revenue outside North America was up 3% from the previous quarter and operating margins in the same region increased to 22%. Revenue in North America increased by 2% from the second quarter of 2009, but operating profit for the region was down 92%. $192 million of the company's operating income came from the Middle East, with $46 million attributed to North America
Second Quarter 2009 Summary
In the second quarter of 2009 net revenue fell 10% to $3.5 billion as compared to the first quarter of 2009. Net income was down by 31% to $262 million as compared to the same period in 2008. The declines were attributed to falling natural gas prices, declines in exploration and production activities, as well decreased customer demand. However, there was an improvement in conditions as 4th quarter revenues were 3% higher than 3rd quarter revenues primarily because of a 14% increase in rig count. 
First Quarter 2009 Summary
Net income for the first quarter of 2009 was $378 million, down 35% as compared to the first quarter of 2008. Revenue was down 3% to $3.9 billion. The fall in income and revenues were primarily attributed to a large decrease in drilling activity in North America, and a decrease in demand for products and services. This decrease led to pricing and volume reductions and a 30% drop in rig count in North America. Operating income in North America itself fell by 53% as compared to the same time in 2008. In July of 2009 Halliburton completed the extension of a two year contract with StatoilHydro ASA (STL-OS) for $450 million. The first contract was awarded to Halliburton in 2006 with further extension options of three two year periods. Under the contract the company will provide fluids systems for multiple fields on the Norwegian continental shelf, which includes fluid services on 16 rigs and cementing services for 20 rigs.
At the end of 2008 revenues were $18.3 billion, an increase of 20% over 2007 and operating income was $4.0 billion, an increase of 15% over 2007. This reflected an operating margin of 22%. Due to increased efforts to grow non-North America operations, revenues and operating income grew by 22% and 26% respectively. Notably revenue from Latin America increased by 35% to $2.4 billion and revenue and operating income in the Middle East/Asia grew by over 20% as compared to 2007.
KBR has received significant negative press in connection with its US government contracts in Iraq. These contracts cover issues such as the building of roads and the building & operating of bases in Iraq and Kuwait. The following were the impetus for the spinoff:
Note of interest to social investors: Halliburton and KBR are currently being sued for allegedly covering up the the gang-rape of a now-22 year old female employee in Iraq. ABC News is investigating the story and will be airing it in a 20/20 report.
Possible recriminations from KBR remain even though it has already been spun off, it was still being investigated over an alleged 180 million dollars used to bribe Nigerian officials to get lucrative oil drilling contracts, until February 21, 2010, a joint committee of the Senate determined that the investigation into the bribery be suspended, potentially saving Halliburton from further public demonization. 
At the end of October 2009 Halliburton announced its acquisition of Geo-Logic Systems, LLC. Geo-Logic Systems develops software to create complex geologic interpretations and construct geologic models. The addition of Geo-Logic Systems strengthened Halliburton's ability to provide customers with advanced modeling solutions to address difficult exploration and drilling projects.
Halliburton Company (HAL), in May 2008, made a $3.4 billion (1.71 billion pounds) cash offer for U.K.-based Expro International Group. urging demand for oil from developing economies such as China and India have pushed oil to record levels over the past year. With oil commanding such a high price, Halliburton and its larger rival Schlumberger Ltd, have profited as oil-rich nations have turned to the oil-services firms for help with excavation and exploration, forgoing the assistance of international oil majors, in hopes of keeping a larger chunk of revenue for state coffers.
At the same time oil demand is skyrocketing, some of the easy-to-reach oil deposits are starting to dry up, forcing the oil majors to experiment with more-challenging and - and much-more costly - deep-sea drilling expeditions. Oil at $135 a barrel can cover the cost of hard-to-reach sites that were previously considered financially unfeasible. Such heavy-hitters as Exxon Mobil (XOM), BP (BP), TotalFinaElf, S.A. (TOT), ChevronTexaco (CVX), CONOCOPHILLIPS (COP), and Royal Dutch Shell (RDS'A), will spend a record $98.7 billion this year on exploration and production, according to Lehman Brothers Fin SA (LEH).
And some of that almost $100 billion in exploration and production fees is bound to end up in Halliburton’s pockets. Expro is a leader in deep-sea oil exploration and the firm’s experience with underwater wells at levels deeper than 1,000 meters (3,281 feet) will be a nice complement to Halliburton’s existing services.
On June 23rd, Halliburton announced that Expro had rejected an increased offer; the independent directors of Expro support a £16.15 per share bid by UK's Umbrellastream instead of the £16.25 per share offer by Halliburton. HAL received a 2-day stay on the Umbrellastream deal to try, and is seeking a 14-day adjournment to allow shareholders to consider the deal. In July of 2008 after the court case by Halliburton was denied, Umbrellastream Limited completed the acquisition of Expro for £16.15 per share.
Halliburton has four main businesses related to oil exploration and production:
These businesses are combined into two main segments:
Headquartered in Dubai, Halliburton has operations in over 70 different countries. This high level of international exposure provides some degree of protection from economic downturns in any one country. Its business operations are categorized into four primary geographic regions: North America, Latin America, Europe/Africa/CIS and Middle East/Asia. In 2008 43% of revenue was from the United States, however the company focused on growth in non-North American regions. Revenue and operating income grew by 22% and 26%, respectively, outside of North America as compared to 2007. Notably revenue from the Latin American region increased 35% to $2.4 billion and operating income increased by 49% to $521 million as compared to 2007. Revenue and operting income grew in excess of 20% in the Middle East/Asia region.
Halliburton's revenue is highly correlated with world-wide drilling activity, which is demonstrated by numbers of utilized rigs.
There are two important drivers of drilling operations. The first is that drilling activity will increase as commodity prices rise (see trend articles: Rising/Falling Oil Prices, peak oil, and Natural Gas). When the price of the commodity being drilled for increases, more drilling becomes economically feasible. In other words, it becomes worth it to drill in more places, places that previously may have been too difficult or expensive to drill. A good example of this is the Gulf of Mexico market in 2008, where drilling increased despite the high costs of deepwater drilling.  As U.S. prices reached historic highs of $146 per barrel in the middle of July 2008, so did the U.S. rig count, moving over 2000 active rigs. Similarly, when oil dropped due to slowing demand, so did rig counts. In October 2009 oil prices were just over $70 per barrel down over 50% since July 2008; following this drop in oil prices, rig counts fell by 47% to 1,040.
The second driver for drilling is the need to locate new reserves. Demand for worldwide oil continues to rise, fueled by rapidly developing countries such as China and India. Currently, 70% of oil production comes from mature wells and to continue to meet demand, exploratory drilling must be increased. The necessity of exploratory drilling will continue to drive the need for more rigs.
See a more complete description of why natural gas usage trends may change here: Natural Gas
During the week of July 14th 2008, it was revealed that natural gas inventories had gained 104 Bcf; on July 17th, shares of natural gas producers fell as investors made a run on the gas market. Later, in September 2008, a report by the IEA predicted natural gas imports will reach about half of world demand by 2015; though the OECD North America will still produce 90% of its own natural gas, imports will double. Because of the 2008 Financial Crisis, however, natural gas demand has been falling since the summer of 2008. In September, demand for natural gas declined by 2.62%, according to the EIA. As excess supply in North America can't be cheaply shipped to other countries, falling domestic demand has translated into rapidly falling prices and reductions in gas drilling. Data from July 2009 shows that the number of drills operating in the U.S. is down by 55%, or 851 rigs, year on year. This reduction in production, however, should help bring prices back up rapidly once demand starts to increase, as there will be a lag between the time demand starts to rise and the time enough rigs are in place for supply to catch up.
Halliburton is in a good position to take advantage of any increase in natural gas usage because they have a large proportion of pressure pumping market-share. Their sales account for around 32% of the market in pressure pumping. Pressure pumping is a more efficient way to extract natural gas then conventional methods.
As part of a larger trend towards natural gas exploration, Halliburton has entered into an agreement with Realm International Energy to evaluate shale deposits for oil and natural gas production. Shale deposits are already a proven and significant resource in North America, but have yet to reach that status around the globe. Initially, the tandem will target Europe, and they have already identified 8 shale deposits in seven European countries where they are aggressively pursuing petroleum and natural gas leases. As part of the agreement, Realm Energy will use Halliburton's extensive knowledge of shale exploration and practices from North America and apply it to European targets.
In the third quarter of 2009 the number of active natural gas rigs increased by 14, potentially signaling positive movement in the industry. Active rig counts reached a peak of 1,606 rigs in the second half of 2008. In October 2009 rig counts were down to 726, 55 percent lower than peak levels, but steadily rebounding. During the same period inventories hit a record high of 3.66 trillion cubic feet (Tcf).
Over the first half of 2009 companies had scaled back oil and gas drilling operations due to falling commodity prices and restriction on access to credit. This increase in drilling activity is a sign that companies are bringing oil and gas rigs back online and could be a signal of industry stabilization and improvement.
For a complete description of how geo-political issues affect companies see: Oil's Nationalization & Geo-Political Turbulence
The downside to Halliburton's international exposure is the fact that much of its operations take place in areas with unresolved political conflicts. These conflicts can generate costs to Halliburton in the form of unforeseen operation costs, unexpected operating hurdles and dangers for employees. Acts of terrorism and costs of employee protection are examples. Currently, the instability in the Middle East (including the war in Iraq), conflicts in Nigeria and Venezuela political issues all fall in this category.
In addition to geo-political turbulence, drilling activity is effected by seasonal weather patterns. In the Gulf of Mexico, for example, the hurricane season tends to bring down third-quarter production, as seen in the $33 million decline in Halliburton 3Q08 Gulf activities.
Halliburton and its peers are subject to intense environmental regulation, in regards to contamination of the environment and, increasingly, climate change. Environmental regulations lead to cost increases, as the company is often fined for not following regulatory procedure. In 2008 accrued environmental liabilities totaled $64 million. Some of the US laws and regulations affecting the company are as follows:
Baker Hughes(NYSE:BHI) and Schlumberger Limited (NYSE:SLB) are Halliburton's main competitors, though the recent merger of GlobalSantaFe and Transocean has created the second-largest deepwater drilling company in the world, providing major new competition for the company.
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