Halliburton Beats Consensus Estimates but Margins Take Big Hit

By Markets Fool.com

Halliburton announced adjusted income of $418 million, or $0.49 per diluted share, for the first quarter of 2015 versus consensus estimate of $0.37 per share. However, on a GAAP-basis, the oilfield services giant reported a net loss of $0.76 per diluted share primarily due to a non-cash, after tax charge of $823 million that reflected the continuing turmoil in the oil and gas industry.

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Image source: ConocoPhillips.

The break down
The Houston-based company reported total revenue of $7.1 billion -- a 4.1% decline year over year. The bigger Completion & Production, or C&P, segment revenue stood at $4.2 billion, while the Drilling and Evaluation, or D&E, segment clocked $2.8 billion. Both segments witnessed an equivalent 4% decline in revenue from last year's first quarter.

Operating profits, however, declined more steeply with the C&P segment declining a substantial 30% year over year to $462 billion, while the smaller D&E segment decreasing 23% to $306 million over the same period.

North American weakness continues
Not surprisingly, North America -- which constitutes 50% of total revenue -- led the profit decline. The Completion and Production division saw operating income fall by 48% while the Drilling and Evaluation segment fell a whopping 71%. It certainly reflects that the company's costs and expenses have increased despite the downturn. Halliburton's suppliers don't seem to have shouldered the costs while the oilfield services company has been forced to renegotiate pricing terms with its customers.

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In short, the 21% fall in North American land rig count has resulted in a 54% decline in operating income. It's pretty evident that Halliburton's business strength and profit-making ability remarkably hinges on the volume of business conducted. North American operating margins fell 755 basis points to 7.9% from 15.4% in Q1 2014.

Latin America and Middle East shine
The bright spot has been the Latin American market which saw a 10% increase in revenue and a 22% surge in operating income, primarily due to improved activity and profitability in Venezuela. But a devaluation in Venezuelan currency saw Halliburton record a $199 million additional charge. Additionally, Brazil and Mexico continued to disappoint due to reduced testing and fluid services. Latin America constitutes 13.5% of total revenue.

The Middle East, too, continued to impress with a 13.4% increase in revenue and a 33% increase in operating income. Operating margins thus soared to an impressive 19.2% from 16.4% a year ago. Revenue from this region constituted 21.7% of total revenue.

The Europe, CIS, and African market disappointed. Operating income fell 41%, on a 16% decline in revenue. This segment constitutes 16% of total revenue. Clearly Halliburton's international business was more resilient than its domestic counterpart.

Special charge could be worrying
The company also recorded a special charge of $1.2 billion before tax, or $823 million after-tax, related to "asset write-offs, inventory writedowns, impairments of intangible assets and severance costs". While the company hasn't elaborated further on these expenses, a clearer picture should emerge after the earnings call.

Foolish takeaway
Halliburton still beat consensus estimates on its adjusted earnings and the market has rewarded the stock with a 4% rise at the time of writing. Additionally, with the Baker Hughes deal getting shareholder approval, the bigger company could prove to be more resilient in such a downturn. However, for now, low margins are worrying.

The article Halliburton Beats Consensus Estimates but Margins Take Big Hit originally appeared on Fool.com.

Isac Simon has no position in any stocks mentioned. The Motley Fool recommends Halliburton. The Motley Fool owns shares of Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.