Halliburton (IL/A): First Take: Strong E&C margins + lower tax rate drive 1Q EPS upside Goldman Sachs April 21, 2005
HAL 1Q2005 EPS of $0.58 was ahead of GS/ consensus of $0.45 w/ stronger E&C margins (+$0.09), lower tax rate (+$0.06) + higher corporate + other expense (-$0.02) main variances vs our estimate. Stronger E&C profits reflect restructuring benefits (sustainable), improved contract performance + a favorable Iraq-related settlement (possibly not sustainable). Oilfield results were stronger than expected in DFE + N. America, but weaker in Production Optimization and Mid East/ Asia + not nearly as strong relative to expectations as last week's report by BHI (O/A), which beat consensus by 25%. Still, consensus for HAL is likely headed significantly higher - possibly to the $2.20-2.30 range from $1.95 currently - as E&C performance is clearly stronger than expected. We expect HAL shares to rally on the news, w/ the oil services group likely to see a halo effect. Maintain IL/A + $53 fair value.
CORE OILFIELD RESULTS ESSENTIALLY IN LINE
Part of our thesis is that 2005 will be a year in which margins across the oil services industry will surprise on the upside whereas margins generally disappointed in 2004. Although BHI's pre-announcement last week was clearer evidence, HAL's 1Q2005 oilfield margins were also slightly stronger than expected (18.5% vs GS estimate of 18.4%) w/ HAL oilfield revenue slightly (1%) below our estimate. Incremental margins of 57% yoy/ 80% seq were very healthy. By product line, Drilling & Formation Evaluation revenue was 3% above expectations + segment margins of 16.4% vs GS estimate of 13.7% = 89% sequential incremental margins were the highlight of the quarter in the oilfield division. Fluids revenue was 1% below our estimate with margins of 17.9% also above GS estimate of 17.2% = 88% sequential incrementals. Production Optimization revenue was 3% below our estimate and margins were 20.1% vs our estimate of 21.5%. By geographic region, N. America was very strong with revenue +8% sequentially and +30% yoy and seq/ yoy incremental margins of 170%/ 97% were also very impressive. L. America and Europe/ Africa were about as expected and Mid East/ Asia was weak, with revenue/ incremental margins flat year over year and down 10%/61% sequentially. Most oilfield companies have indicated that the Middle East should be one of the strongest growers in 2005.
DIGITAL & CONSULTING SERVICES WELL ABOVE EXPECTATIONS
Segment revenue was 1% above expectations, but operating income was almost 50% stronger despite another charge related to integrated solutions projects in Mexico.
E&C PROFITABILITY BENEFITING FROM RESTRUCTURING + IRAQ SETTLEMENT
E&C revenue was 7% below our estimate, but operating income was almost 3x our estimate, with 3.8% margins well above our estimate of 1.3%. HAL disclosed that E&C profitability benefited from a favorable customer settlement related to work in Iraq under the LogCapIII contract, which we estimate had about a $20-30 mln ($0.03-0.04) favorable impact on 1Q2005 results.
QUESTIONS FOR THE CONFERENCE CALL?
1. Sustainability of improved E&C margins?
2. Why did Production Optimization revenue and margins decline sequentially?
3. Outlook for tax rate?
4. Why was corporate expense 33% higher than expected?
5. Is improvement in drill bit margins sustainable?
6. Outlook for growth + improved margins in Mid East/ Asia oilfield business?
7. Update on timing of strategic disposition of E&C?
8. Digital/ Consulting Svs - should margins improve further or will Mexico losses continue?
I, Terry Darling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
