Guar Gum Purchases Prove Sticky Business as Halliburton Posts Record Second-Quarter 2012 Revenue

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Researched by Industrial Info Resources (Sugar Land, Texas)--Energy services provider Halliburton Company (NYSE:HAL) (Houston, Texas) reported record companywide revenues in the second quarter of 2012. Three of Halliburton's international regions saw record revenues, as did eight of its product service lines. However, profits were somewhat deflated by higher costs and stronger pricing pressure in North American production services--especially for guar gum, a blending additive used in the hydraulic fracturing processes that the company purchased in very large quantities. Net income for the quarter was reported to be $737 million, only about $2 million less than in second-quarter 2011.

Total revenues stood at $7.23 billion, a 21.89% increase from the same period last year. The Completion and Production (C&P) segment saw higher demand in U.S. oil- and liquids-rich basins, while the Drilling and Evaluation (D&E) segment reported stronger demand for fluids in the Gulf of Mexico. Internationally, C&P saw solid growth in the Eastern Hemisphere and D&E saw increased drilling activity. As expected, the C&P segment was negatively affected by the seasonal Canadian spring break-up, which reduced the Canadian rig count 70% sequentially. Hydraulic fracturing operations incurred heavy pricing pressure, including the higher costs for guar gum.

The company continues to see activity move away from natural gas to oil basins, with oil- and liquids-directed activity making up more than 70% of the rig count at the end of the quarter, which is the highest level in about 25 years. The natural gas rig count hit a 12-year low. Last quarter, Halliburton executives noted that oil rigs represented 64% of the total U.S. rig count during the quarter, calling the shift from natural gas to oil "dramatic and disruptive to operations."

Industrial Info is tracking more than $51 billion in active projects involving Halliburton, including the $20 million expansion of an oil & gas field services plant in Williston, North Dakota. The project involves constructing a 35,000-square-foot shop and 1,000-square-foot truck-washing facility on property adjacent to the overcrowded facility. The company also is serving as a contractor on the first phase of a water injection project at the West Qurna Oil Field in Al Basrah, Iraq. The project involves overhauling 64 old wells and pumping 2 million barrels per day of water, as well as installing 80 kilometers of pipelines. The projects are scheduled to be completed in December 2012 and January 2014, respectively.

"Today, supply concerns around guar have eased and spot prices have declined, but costs remain high relative to historical levels," said Dave Lesar, the chairman, president and chief executive officer of Halliburton, in a conference call. "Furthermore, the decline in oil and gas prices in the second quarter has made our customers more reluctant to accept price increases to cover our incremental guar costs. Because of the large reserve of extra guar inventory we have on hand, our results will reflect an even higher cost-of-sales impact over the remainder of this year as we work through our supply of this higher-than-average-cost guar."

Lesar later added that much of Halliburton's North American profit decline in the second quarter was due to escalating guar costs, and that the company would have to work down its inventory. "In 20:20 hindsight, simply put, we made the wrong decision. We bought too much guar, too early, and paid too much for it. We should not have purchased the extra inventory. The impact was dramatic in the second quarter as we absorbed these higher prices, and [will be] even more so in the third and fourth quarters, as we work off the inventory."

All of the company's major regional segments reported higher revenues and when compared with second-quarter 2011, and all but two saw gains in operating income:

• Completion and Production reported first-quarter revenues of $4.46 billion, a 23.27% increase from the same period last year, and an operating income of $914 million, a decrease of less than half a percent:
• The North American region saw revenues of $3.17 billion, a 22.37% increase from second-quarter 2011, and operating income of $691 million, a 16.44% decrease.
• The Latin American region saw revenues of $340 million, a 26.87% increase from the same period last year, and operating income of $54 million, compared with $29 million in second-quarter 2011.
• The European, African and former Soviet region saw revenues of $551 million, a 32.77% increase from the same period last year, and operating income of $95 million, compared with $15 million in second-quarter 2011.
• The Middle Eastern and Asian region saw revenues of $402 million, a 15.85% increase from second-quarter 2011, and operating income of $74 million, a 57.45% increase.
• Drilling and Evaluation reported second-quarter revenues of $2.77 billion, a 19.72% increase from the same period last year, and an operating income of $393 million, a 21.3% increase.
• The North American region saw revenues of $973 million, a 13.54% increase from second-quarter 2011, and an operating income of $166 million, a 2.35% decrease.
• The Latin American region saw revenues of $539 million, a 28.64% increase from the same period last year, and an operating income of $84 million, a 61.54% increase.
• The European, African and former Soviet region saw revenues of $605 million, a 9.21% increase from the same period last year, and an operating income of $64 million, a 20.75% increase.
• The Middle Eastern and Asian region saw revenues of $657 million, a 34.91% increase from the same period last year, and an operating income of $79 million, a 61.22% increase.

Four of the product service lines--Cementing, Completion Tools, Multi-Chem, and Testing and Subsea--reported record operating income.

Halliburton executives expect to continue picking up market share in deepwater and underserved international markets, and especially in international unconventional basins. They expect the gas rig count to continue its downward trend for the remainder of the year, and they anticipate fewer problems with guar costs and equipment relocation in 2013.

"As we look to 2013 for U.S. land, we are optimistic that land activity will continue to strengthen, led by a growth in unconventional developments in oil basins, such as the Eagle Ford and the Bakken [shales], where we are very well-aligned with the long-term asset owners," Lesar said in the conference call. "In addition, we will have worked the higher-priced guar out of our inventory, and expect to be replacing it with more normally priced inventories. In this environment, our North American margins can return to our normalized levels."

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