Will Halliburton (HAL) Q1 Earnings Reflect Rising Costs?

Major oilfield service provider Halliburton Co. (NYSE:HAL) is set to release its first-quarter 2017 results before the opening bell on Monday, Apr 24.

What Investors Need to Know

The company has seen its shares fall 10.3% year to date after gaining more than 50% for 2016. Moreover, The Houston, TX-based company has a poor industry rank. It is one of the major players in the Oil & Gas - Field Services industry, which is ranked 149 out of the 256 industries in our coverage (bottom 42%). Halliburton also has a Zacks Rank #3 (Hold), so fundamentals are pretty tepid for this stock.

To make things worse, it has an ‘F’ for its VGM Score.

On an encouraging note though, the world's second-largest oilfield services company after Schlumberger Ltd. (NYSE:SLB) has an incredible history when it comes to beating earnings estimates. Investors should note that Halliburton hasn’t missed earnings estimates since mid-2014, as you can see in the chart below:

Also, Halliburton’s unimpressive stock performance notwithstanding, the company has managed to beat the broader industry across the past six months- and 1-year periods.

Therefore, true to Halliburton’s ‘Hold’ rating, the signals are mixed and it seems as if it could be a rockier report than one might think.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

The oil services companies (like Halliburton) – providers of technical products and services to drillers of oil and gas wells – kicks off what is expected to be a relatively good earnings season for U.S. energy firms.

With U.S. rig count falling to record levels last year, oilfield services players (like Halliburton) were hit hard. Unprecedented declines in activity levels and a sharp fall in upstream spending led to lower revenues and pricing headwinds.

However, as commodity prices steadily improve and drilling activities pick up, the market for services companies is on the mend. Though we are still not anywhere near the activity highs seen in 2014, spending on exploration projects have experienced a much-awaited rebound. The energy explorers, buoyed by the jump in commodity prices, are set for improving sales and earnings – a part of which is likely to be pocketed by the long-struggling oilfield service providers.

We also appreciate Halliburton’s successful cost-management initiatives in the midst of weak oil prices over a length of time. Last year, the company successfully implemented on its plan of pruning annual costs by $1 billion. In fact, Halliburton has used the challenges prevailing in the industry to its advantage, mainly by offering low cost solutions that aids producers in churning out more by investing less.

On the flip side, Halliburton has already warned that it is likely to miss first quarter profit estimates owing to rising costs mainly from reactivation of equipments and increase in headcount. Moreover, pricing pressure is expected to continue over the near-term with the oil service companies dishing out some big concessions to producers in recent years.

Add to this project delays and job cancellations, which are likely to translate into margin contraction.

Therefore, notwithstanding the nice bump in oil prices, it will take some time for service providers to translate it into earnings gain.

Bottom Line

It is hard to bet against Halliburton when it comes to beating earnings estimates, given the company’s impressive track record. Moreover, the company’s recent share price weakness may render it attractive to the eyes of some investors, particularly those that are in the practice of buying beaten down securities with strong growth potential.

But with contract rates yet to improve sufficiently and a deteriorating credit metrics, it is hard to get excited by Halliburton ahead of their report either. The failed merger with Baker Hughes Inc. (NYSE:BHI) meanwhile literally burned a hole in Halliburton’s stomach as it had to shell out $3.5 billion in termination fees - one of the highest in U.S. corporate history.

Earnings Whispers

Our proven model does not conclusively show that Halliburton will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -25.00%. This is because the Most Accurate estimate stands at 3 cents, while the Zacks Consensus Estimate is pegged higher, at 4 cents.

Zacks Rank: Halliburton has a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Halliburton, here is one firm from the energy space you may want to consider on the basis of our model, which shows that it has the right combination of elements to post earnings beat this quarter:

RPC Inc. (NYSE:RES) has an Earnings ESP of +25.00% and a Zacks Rank #2. The company is likely to release earnings on Apr 26. You can see the complete list of today’s Zacks #1 Rank stocks here.

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