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Looking past loss, Halliburton CEO sees drillers' 'animal spirits' running wild

On the heels of a historically difficult 2016 for the oilfield services sector, Halliburton Co.'s CEO, David Lesar, said Jan. 23 that he is "really excited" about the new year for the industry.

Speaking during the earnings call for the conglomerate's fourth-quarter 2016, in which it reported a loss of $149 million attributable to the company and a total loss of $5.77 billion for the year, Lesar noted the tough situation the industry faced in 2016.

"Never before in my nearly 40 years in and around the oil and gas industry have I seen a more difficult year for the industry. The down cycle in the 1980s was bad, but 2016 represented the sharpest and deepest industry decline in history," he said. "However, today, I'm really excited about what I see happening."

Despite the huge yearly loss, Lesar said Halliburton emerged from 2016 and the aborted merger with Baker Hughes Inc. "in pretty good shape." One of the positives moving forward, he said, came from North America, where drilling activity is starting to rebound after two years of cutbacks.

"I am very pleased to announce that we returned to operating profitability in North America after three quarters of losing money. We achieved incremental margins of 65% in North America [in the fourth quarter]," he said. "On the second-quarter call, I told you that customer 'animal spirits' were back in North America. Last quarter, I said that these animal spirits were alive but somewhat caged up. Now these animal spirits have broken free and they are running."

Lesar cautioned that while the increases in M&A activity and rig count in North America are positives for the company, Halliburton is still taking a slow approach. "Customers are excited again. And our conversations have changed from being only about cost control to how we can meet their incremental demand," he said. "As things began to recover in Q3 and 4, we made a conscious strategic choice to not chase additional market share and erode our profits further. Therefore, our North American revenue did not grow at the same pace as the rig count for the last several quarters. The historically high level of market share we built in the downturn gives us what we call the power of choice in the recovery."

Lesar said Halliburton is in the process of bringing back cold-stacked equipment to meet increased demand but would only do so as long as it is profitable for the company. Having that ability, he said, should help Halliburton's margins in the coming year.

"So as I look at 2017 in North America, I really like how it's shaping up. I expect as we finalize the execution of our strategy that revenue will meet or exceed rig count growth in 2017," he said. "However, we will have to contend with the cost of reactivating frack spreads and inflation on our inputs. Keep in mind that our suppliers also expect to benefit from our customers' animal spirits."

Halliburton's GAAP loss of 17 cents per diluted share for the fourth quarter of 2016 was below the S&P Capital IQ consensus EPS estimate of a 2-cent profit. On a normalized basis, according to Capital IQ data, Halliburton earned 4 cents per share in the fourth quarter of 2016, compared to a consensus EPS estimate of 2 cents.