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The race for international market

Schlumberger Limited (SLB) and Halliburton Company (HAL) are the top two largest market cap US oilfield equipment & services (or OFS) companies. Both the companies’ management expressed optimism over a recovery in the international market in their Q2 2018 earnings conference calls. In particular, SLB’s management is more upbeat on a recovery in Russia, Asia, Latin America and the Middle East. Although Schlumberger has a more balanced portfolio (62% of its revenue coming from the international business), its revenues from international operations dipped in the second quarter.

 

In Q2 2018, Halliburton’s revenues from international operations increased 5.8% over a year ago. Halliburton’s management plans to improve its international business performance through contract start-ups, pricing improvement, and new technology introduction. Halliburton expects improved pricing in its international business in 2018. In the Q2 2018 conference call, it noted

“We’re experiencing the positive impact of incremental activity on margins. We believe that the second half of 2018 will be better for our international markets. And contract wins in key segments are providing us the foundation to expand international margins in 2019.”

Should the upstream activity level in the U.S. falls, or activity in the international market picks up, Halliburton is positioning itself better to reap the benefit. In fact, Halliburton’s management has already cautioned about the capacity constraint in the Permian and in a few other onshore shales. This can thwart North America-centric oilfield services companies’ road to recovery.

Comparing free cash flow growth

Halliburton recorded $391 million free cash flow in Q2 2018. This was a steep jump compared to Q2 2017 when HAL’s FCF was a meager $19 million. Led by a sharp revenue rise, HAL’s cash flows from operations increased steeply in Q2 2018 and strongly outweighed a capex increase, leading to the free cash flow improvement in Q2 2018. In comparison, Schlumberger’s Q2 2018 FCF increase was less sharp (32%) compared to a year ago.

What this means in Halliburton has better elbow room to play with the improved free cash flow. It can use this to expand its product and service offerings, develop new products, make acquisitions, pay dividends and reduce debt. Here are HAL’s plans for 2018 and beyond, as the company discussed in the Q2 2018 conference call,

“Going forward, we expect to generate strong free cash flow and still plan to retire the $400 million note that matures in August. In addition, in the second half of this year, we are targeting to both retire our $500 million 2021 debt maturity as well as initiate share repurchases under our existing authorized program.”

Comparing net debt

Halliburton’s balance sheet improved in Q2 2018 compared to a year ago through lower net debt, while Schlumberger added on net debt during the same period. As of June 30, 2018, Schlumberger’s net debt increased 15% to $14.5 billion while Halliburton’s net debt decreased 7%. This was primarily because HAL’s total debt also declined in Q2 2018.

Halliburton has already disclosed its plans to reduce debt, as we noted in the previous section. Investors may note that socks that tend to outperform are those which are financially healthy and able to meet their financial obligations without much strain.

Year-to-date, Halliburton has decreased 17% vis-à-vis a 4% dip in Schlumberger’s stock price. In comparison, the VanEck Vectors Oil Services ETF (OIH), which represents the oilfield equipment & services industry, has declined 5% year-to-date. Halliburton’s geographic mix, lower debt level, and fast improved free cash flow put it in a position where its stock price can bounce back more sharply than Schlumberger’s.  Investors should watch out for the race between these two behemoths to the top.                  

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