Halliburton has seen a leveling off of its customer satisfaction marks recently, bringing to a halt the downward drift it experienced last year. Its plight going forward seems to increasingly hinge on the company’s Frac of the Future initiative.
Below are some observations on what we’ve read and heard from company management and its customers as of late, as well as input from others in the oilfield:
- The company’s strategy of focusing on global unconventional development, deepwater and mature-asset opportunities seems solid. We view management’s aim to achieve growth targets organically as a positive for stakeholders.
- We’ve heard nothing to suggest the Frac of the Future (FOF) initiative and related back-office efforts (the implementation of which is referred to as “Battle Red” inside the company) won’t continue to be rolled out as planned.
- EnergyPoint’s conversations with customers to date indicate high levels of interest and enthusiasm for FOF. However, we won’t know for sure whether FOF, which includes a transitioning to a fleet powered by the company’s new Q10 pump, will be the paradigm shift the company hopes for at least several quarters.
- We were very impressed with Jeff Miller on the 4th quarter 2012 earnings call. Miller was recently promoted to COO, having served previously as Halliburton’s SVP of Marketing & Business Development. He appears to have a strong understanding of what, why and how he wants to execute the company’s strategy.
- Miller emphasized that Halliburton will not work fracking crews and equipment at rates below those needed to cover capital costs. In our experience, such discipline typically puts constructive pressure on a supplier to maintain high levels of service and performance. And we think that’s a good thing.
- We’re not sure what Miller’s promotion means concerning Tim Probert’s future role at the company, if anything. We note that Probert, who holds the title of President – Strategy & Corporate Development, was not on the most recent earnings call. He’s certainly been a steady hand over the last few years. If he stays in the fold, Halliburton’s executive suite looks to be a strength.
- The company stacked ten pressure pumping fleets during Q4 2012 but kept the trained crews associated with the fleets on the payroll. This will ensure performance will not suffer once back in the field. We believe Halliburton grasps better than most that the boom-bust nature of the industry is a threat to long–term service quality and reliability.
Below are some additional items of interest, and our observations, from the recent earnings conference call:
- The company believes Q4 212 marks the low point for North American margins this cycle. That said, the company is hesitant to say that North American growth will be anything other than unremarkable in 2013, as pricing pressures remain. Management expects no net horsepower to be added to North American pressure pumping this year.
- On the international side of its business, the company sees both revenue and market share growing.
- Only one month’s worth of high-cost guar gum remains in Halliburton’s inventory. That said, guar gum’s current price is still above historical levels. Fortunately, the company’s recently developed synthetic guar alternatives have been successful in the field, effectively placing a price ceiling on Halliburton’s guar gum costs going forward.
- The greater incidence of pad drilling, more advanced rigs, improved drilling processes, and greater use of 24-hour operations are all combining to improve efficiency in the U.S. land market. Days needed for an average horizontal well have fallen around 15% in the last year. Further improvements are expected as the industry continues to move toward factory-type operations.
- The company recently opened its Advanced Perforating Flow Lab, which allows for the simulation of various types of perforation environments in a controlled setting. With recovery rates gaining increased attention among customers, we find this new facility intriguing.
The Bottom Line
We’ve noticed over the years that Halliburton has a habit of taking a step backwards every now and then, only to take a larger leap forward soon thereafter. If 2012 was a step backward, we’ll be watching to see if 2013 is a jump forward. Management certainly looks to be serious about defending its position in hydraulic fracturing with FOF, and its enthusiasm for prospects internationally is palpable.