Halliburton (IL/A): Outlook strong despite lackluster 3Q2005 results - Goldman Sachs - October 26, 2005
Despite uninspiring 3Q EPS vs expectations and SLB due to E&C losses + subpar non-N. America oilfield performance, we see HAL continuing to benefit from a strong cyclical tailwind w/ 31% upside potential to our $78 fair value, which we've raised from $72 based on higher estimated 2006 EPS. We are raising our 2006-07 EPS estimates to $3.70/ $4.25 from $3.46/ $3.91 due mainly to our new 2006 E&P spending outlook of +20% vs +15% previously. Building E&C backlog (higher margin LNG + GTL projects) also increases potential of stronger 2H2006-2007 E&C revenue performance. We are lowering our 2005 EPS estimate to $3.04 from $3.16 due mainly to hurricane impact. Although yesterday's sell-off has improved relative valuation, weaker non- N. America performance vs SLB + BHI lead us to look for further improved valuation before becoming more aggressive. Maintain IL/A rating.
3Q05 EPS IN LINE EX-HURRICANE
Excluding hurricane impact, recurring EPS of $0.87 was in line with our estimate and above $0.82 consensus. Reported EPS of $0.95 included a $0.13 gain on the sale of an equity interest in a toll road and a $0.05 negative impact from the hurricanes. Total ESG revenues of $2.6 bn were up 7% sequentially and slightly above our estimate driven by continued strength in Production Optimization, which was 3% above our estimates. Core oilfield incremental margins were lower than expected due to sequential declines outside N. America (lower export sales + costs associated with exiting unprofitable countries), but total ESG operating income of $594 mln was in line due to stronger margins in Digital and Consulting Solutions. At KBR, revenues of $2.5 bn were down sequentially in part due to decreased military support activities in Iraq. Excluding non-recurring items, Government and Infrastructure operating income was in line. Energy and Chemicals operating income was well below our estimates due to charges related to change orders on projects in Algeria as well as the write-down of the value of an Algerian joint venture. Corporate expenses of $26 million were lower than our $33 million forecast due to lower professional fees, but are expected to trend back up in the 4Q.
RAISING ESTIMATES ON HIGHER E&P SPENDING
We are raising 2006-07 EPS estimates to $3.70/$4.25 from $3.46/$3.91 as we've raised estimated 2006 E&P spending growth to 20% from 15% (still 8% in 2007), which boosts revenue growth for HAL and other oil services companies. We will continue to make similar changes as other companies report. For 2006, the $0.24 increase in our estimates is due to:
(1) +$0.21 in higher ESG operating income, mainly Fluids and Production Optimization;
(2) +$0.11 in higher operating income at KBR, mainly in Government and Infrastructure; and
(3) -$0.10 for minor adjustments to nonoperating items. For 2005, we are lowering our 4Q05 EPS estimate by $0.04 primarily due to the continued negative impact of the hurricanes, which results in a lowering of our full-year 2005 EPS estimate to $3.04 from $3.16 after also incorporating 3Q05 actual EPS.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Terry Darling and Jerry Revich. |
