Aggressive Cost-Cutting May Not Be Enough
Haliburton (NYSE: HAL) reported earnings on Monday after the bell and did not give much in the way of good news. For the second quarter that is. The company reported quarter-to-quarter and year-over-year declines in revenue and earnings, saw weakness in all segments, and a widening loss and yet shares are up 5.0% in the after-hours market. The reason is simple, Haliburton’s quick and nimble actions early on in the crisis, both the oil-price-war and COVID-19 pandemic, have positioned the company to accel in the new environment.
“Halliburton’s second-quarter performance in a tough market shows we can execute quickly and aggressively to deliver solid financial results and free cash flow despite a severe drop in global activity. Our results demonstrate a significant and sustainable reset to the power of our business to generate positive earnings and free cash flow,” commented Jeff Miller, Chairman, President and CEO.
Haliburton - The Results Are In
On the top line, revenue of $3.2 billion is down 46.0% from the previous year and more than 30% from the prior quarter. Net revenue missed by 460 basis points, a shortfall that carried through to the bottom line in spades. On a GAAP basis, the company’s loss widened to $1.91 per share, $1.77 more than the analyst’s consensus, but that is not what the market is focused on. On a non-GAAP adjusted basis, due to aggressive cost-cutting, earnings are positive and well above consensus while cash flow is surprisingly good.
Adjusted earnings of $0.05 beat consensus by $0.17 proving the companies resilience during the crisis. While dependent on oil demand for its business, even with lower demand there is still business to be found and demand is rising along with the global rebound.
“We have an excellent international business, an efficient North America service delivery improvement strategy, a disciplined capital allocation approach, and a committed and competitive team. Our continued deployment of leading digital technologies will drive efficiency and cost reductions for our customers and Halliburton … Halliburton is charting a fundamentally different course. The strategic actions we are taking will further boost our earnings power and ability to generate free cash flow as we power into and win the eventual recovery,”
Haliburton Analysts Aren’t So Sanguine
The analysts are generally bullish on Haliburton but that’s not saying a whole lot. Of the 31 current ratings 19 are neutral and 1 bearish which makes this more of a neutral market in my opinion. One reason is that the YOY comps next year aren’t going to be good. While there is a rebound in the market underway, oil prices and demand are not expected to match the pre-COVID levels and that is going to impact future revenues. Haliburton’s business will fall as oil-field operators cut back on production and exploration.
What investors should consider is if the downtick in business is already factored into prices, and how the 2nd quarter results reflect on the dividend. The company cut its distribution earlier in the year in response to the twin-threat of COVID and oil prices and now that move looks fairly smart. The yield is low, about 1.30%, but the payout is safe and apparently getting safer in light of the company’s cost-cutting and repositioning efforts.
The catch is that next year’s consensus puts the payout ratio above 100% and in territory that I never like to see. The question now is if the analysts are right about next year or, if like in so many other cases I’ve seen this earnings cycle, the consensus estimate is too low and about to start moving higher. In that case, next year’s payout ratio could easily move back to more manageable levels.
Haliburton Technical Outlook: A Rally In Progress?
Shares of Haliburton are up more than 5.0% in the early market and look like they are in rally mode. Today’s move confirms support at the short-term moving average and is in turn confirmed by the indicators so there is evidence a rally is getting underway. The caveat is that resistance exists near the $16.50 level that could keep price action from moving much higher. A move to $16.25 would be worth about 14%, not counting the dividend, and could lead to further gains if it is surpassed.
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