Schlumberger (OP/A): The quarter we've all been waiting for
Goldman Sachs July 22, 2005
SLB 2Q2005 EPS of $0.78 was well above our estimate + consensus of $0.67 w/ revenue + operating income 7% + 17% above expectations. Sequential/ Y-Y incremental margins of 43%/44% reveal a step function improvement in pricing power outside N. America, with every geomarket - yes, even including L. America - strongly ahead of expectations. Seismic was down sequentially, but not as much as expected = positive implications for BHI. Equity income - mainly from SLB's fluid j.v. with SII - was below expectations, giving reason to be nervous about SII's relative performance in 2Q. HAL (#2 in fluids behind SII) had a solid qtr in fluids (50-60% of SII profits), but other product lines were much stronger. We expect SLB shares to rally on the news with 2006 EPS estimates + our $95 fair value likely headed higher by 15-20%. Maintain Outperform/Attractive rating.
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.
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Halliburton (IL/A): First Take - a very strong quarter
Goldman Sachs July 22, 2005
Like BHI in 1Q2005, HAL reported an extremely strong 2Q2005 EPS after the close of $0.76 vs our $0.59 estimate + consensus of $0.56. Oilfield op inc rose 30% sequentially (20% above our estimate) on a 13% increase in revenue (6% above our estimate) driven by Europe/ Africa + MidEast/ Asia and by production optimization + drilling/ formation evaluation. E&C op inc was 53% above expectations driven by Iraq award fees. We expect HAL shares to rally - the extent of which will be driven by the relative performance of SLB's earnings. Assuming no unexpected unsustainable items revealed on HAL's conference call, we see 2006 EPS headed for $3.25 + fair value to the $65-70 range. Our preference for BHI + SLB has been based on stronger foreign franchises, exploration exposure + expected EPS revisions, but HAL's 2Q performance is undeniably impressive. 2Q05
EPS WELL AHEAD OF OUR STREET-HIGH ESTIMATE
HAL 2Q05 EPS of $0.76 was $0.17 or 29% ahead of our Street-high estimate of $0.59 (Street was at $0.56) with ESG division contributing 2/3rd of the variance and KBR about 1/3rd. Drilling + Formation Evaluation accounted for +$0.05 of the variance, Production Optimization +0.06, Fluids +$0.01, and KBR +$0.06.
EXHIBIT 1 : QUARTERLY REVENUE TRENDS (IN $ MILLION) Revenues:
2Q04 1Q05 2Q05E 2Q05A VAR (%)
Drilling/Formation Evaluation $425 $489 $521 $566 9%
Fluids 554 631 666 699 5%
Production Optimization 795 900 960 1,046 9%
Total Upstream Oilfield $1,774 $2,020 $2,147 $2,311 8%
Landmark + Other ESG 130 164 175 160 -9%
Energy Services Group $1,904 $2,184 $2,322 $2,471 6%
Engineering & Construction 3,052 2,754 2,800 2,692 -4%
Total Company Revenues $4,956 $4,938 $5,122 $5,163 1%
Company reports and Goldman Sachs Research estimates
EXHIBIT 2: ESG OPERATING PROFIT TRENDS (IN $ MILLION) 2Q2005 ESG operating profits were +20% vs. our estimate w/ margins +260bps/+700bps seq/y-y.
Operating Profits: 2Q04 1Q05 2Q05E 2Q05A VAR (%) Drilling/Formation Evaluation 59 80 89 126 42%
Op. Margin 13.9% 16.4% 17.1% 22.3%
Fluids 77 113 125 135 8%
Op. Margin 13.9% 17.9% 18.8% 19.3%
Production Optimization 119 181 201 245 22%
Op. Margin 14.9% 20.1% 20.9% 23.4%
Total Upstream Oilfield $255 $374 $415 $506 22% Op.
Margin 14.4% 18.5% 19.3% 21.9%
Landmark + Other ESG $14 $29 $22 $16 -27%
Op. Margin 10.8% 17.7% 12.5% 10.0%
Energy Services Group 269 403 437 522 20%
Op. Margin 14.1% 18.5% 18.8% 21.1%
ESG REGIONAL PERFORMANCE - STRONG INTERNATIONAL RESULTS
Oilfield revenue in Europe/Africa/CIS was +25% versus our estimate w/ Latin America, Middle East/Asia and NAM each +6%. In terms of operating income, Middle East/Asia was +58% versus our est while Europe/Africa/CIS was +38%, NAM +16% and LAM -28%.
KBR MARGINS WERE +160 BPS AHEAD OF OUR ESTIMATE - TAX RATE LOWER
KBR margins were 4.5% versus our estimate of 2.9%. Government & Infrastructure margins were 3.6% (+150bps) - benefiting from Iraq performance award fees - while Energy/Chemical margins were 7.5% (+506bps). Tax rate came in at 28% vs 31% ($+0.02 impact).
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. |
