Halliburton is a large oil services company with operations in North America and internationally. The company reports in two segments: completion and production, and drilling and evaluation.
The amount of the convertible extinguishment was $693 million, or 79 cents per diluted share. Because the expense was non-tax deductible, it brought the GAAP net income to a loss of 2 cents. The company had an excellent quarter with revenue of $4.9 billion, up 24% from Q3 2007 and 9% sequentially. Operating income was $1.04 billion.
Despite the excellent quarter, the stock has sold off with the rest of the energy sector. Halliburton peaked at $55.28 in July and currently sells at $20.
CAPEX Cuts
Many of Halliburton’s customers have cut back drilling plans recently, raising concerns that the company won’t be able to continue its growth. Chesapeake Energy (NYSE:CHK) cut its spending by $3 billion through 2010, and Petrohawk (NYSE:HK) cut its 2009 drilling plan by 33% or $1 billion.
Due to these announced cuts, Halliburton management was questioned during the conference call about current conditions in the sector and its projections for the rest of the year and 2009. Dave Lesar, CEO, outlined his argument for why Halliburton would continue to prosper even if cuts are made:
- The cutback in drilling is directed mostly toward “conventional and shallower drilling activities” while unconventional drilling, where Halliburton is strongest, is stable.
- The credit crunch will help restrain the supply of more capacity coming to market to compete with Halliburton. (Read our frequently asked question How does a credit crunch occur? to learn more.)
- A large portion of revenues is from "large independents and international oil companies". These companies will be less likely to cut drilling plans because they have a longer-term focus.
- The natural gas market is self-correcting, and as drilling is cut back, the market will balance and prices will stabilize.
Lesar pointed specifically to the pressure-pumping market as an area where too much capacity had come to market recently because of easy access to capital. He said that recent events made it "unlikely to attract the sort of additional equity necessary to continue to expand their fleets".
Exxon Mobil (NYSE:XOM) seemed to support Lesar, as later in the day the company said it had no plans to cut back spending $125 billion over the next five years on capital expenditures.
Halliburton is another company that picked the wrong time to buy back stock. During the quarter, the company spent $122 million to repurchase 3.5 million shares. The average price was $34.85, compared to a market price of $20. (Learn more about what these programs mean for shareholders in our article A Breakdown Of Stock Buybacks.)
Bottom Line
Halliburton had a strong quarter despite the headline GAAP loss of 2 cents due to the extinguishments of a convertible debt issue.
