Our addition of Halliburton (NYSE: HAL) to the Model Portfolio and Focus List in early December couldn’t have been timed better, with the stock returning more than 30 percent over this relatively short holding period.
The oil-field services giant delivered another quarter of impressive results, though this time the stock responded in kind. Adjusted for one-time items, Halliburton’s earnings per share and operating cash flow easily beat the consensus estimate, fueled by improving margins and sequential revenue growth of about 9 percent.
More important, management’s bullish commentary and relatively conservative guidance suggest that more upside surprises could be in store for 2018.
A big part of our investment thesis for Halliburton hinges on the company’s industry-leading exposure to the North American onshore market, especially pressure pumping—the horsepower that propels fluid into the reservoir rock as part of the hydraulic-fracturing process.
During Halliburton’s fourth-quarter earnings call, management repeatedly described the market as undersupplied and highlighted the opportunity for judicious capacity additions—the company delivered a handful of new pressure-pumping spreads over the last three months of 2017—and further pricing traction to drive upside in 2018.
Not only is the current supply and demand balance tight, but management also highlighted how the trend toward intense completions—longer laterals, as well as more fluid and proppant—have increased the wear and tear on equipment in the field:
There is no doubt that today’s industry horsepower is working harder than ever before and that the pace of degradation is increasing on active equipment. The impact of wear and tear on the working fleet is demonstrated by the industry’s rise in average horsepower per crew. Today the industry is forced to employ redundancy measures to mitigate nonproductive time on the well site. We know this is happening because we see customers pushing our competitors to bring spreads of 45,000 to 50,000 horsepower to a job while Halliburton remains at 36,000.
Management attributes the superior uptime delivered by its pressure-pumping fleet to its superior design and younger age. I
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Elliott and Roger on Dec. 31, 2019
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