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Schlumberger, Halliburton Q4'18 earnings should reflect weakening market

Fourth-quarter 2018 earnings for oilfield service majors Schlumberger Ltd. and Halliburton Co. are expected to trail the previous quarter and impact full-year 2018 results amid a combination of producer budget exhaustion, North America land pipeline capacity constraints and a crumbling crude oil price.

Schlumberger will release its fourth-quarter 2018 and full-year 2018 earnings on Jan. 18, and Halliburton will follow with its earnings for the same periods on Jan. 22. Analysts expect both companies to report lower earnings quarter over quarter, and slight improvements for the full-year results.

"In our October earnings call, we forecast a fourth-quarter sequential drop in earnings per share, driven by lower activity and softening service and product pricing for hydraulic fracturing in North America Land," Patrick Schorn, Schlumberger's executive vice president for wells, said Dec. 14, 2018, at the Cowen & Co. Energy & Natural Resources Conference in New York City. "In the international markets, we were expecting flat sequential revenue, as further [integrated drilling services] growth would be offset by the winter slowdown in the North Hemisphere with little to no year-end sales."

At the time of the presentation, Schorn said international revenue, excluding Cameron, was more or less in line with expectations, except for signs of weakness in a few countries in Latin America. In North America, revenue from the company's offshore business and land drilling operations was trending flat sequentially. For hydraulic fracturing, however, there was a significantly larger drop in activity than expected, which was leading to a larger drop in pricing than the company anticipated, resulting in a sequential reduction in total North America revenue in the range of 15%.

"We continue to see the weakening of the hydraulic fracturing market as temporary, with the expectation of a gradual recovery taking place over the first half of 2019. Therefore, the fourth-quarter and potential first-quarter revenue declines will come with relatively high decremental margins," Schorn said.

Global Cameron revenue is expected to be slightly lower due to the weakness in its short cycle businesses in North America land, he said.

Based on worsening trends for U.S. land completions and a likely muted amount of year-end product sales, Evercore ISI analysts lowered their fourth-quarter earnings estimate for Schlumberger from 37 cents per share to 35 cents per share.

S&P Global Market Intelligence's normalized consensus estimates points to fourth-quarter earnings per share for Schlumberger of 38 cents, down from 46 cents the previous quarter, while for the full year, the company is expected to have seen earnings climb from $1.50 per share in 2017 to $1.64 per share in 2018.

For Halliburton, the largest provider of hydraulic fracturing services, demand for its services softened in the third quarter as U.S. producers cut down on spending and transportation bottlenecks in the Permian Basin of west Texas and New Mexico pushed down the price of regional crude oil.

In October 2018, during the company's third-quarter earnings call, president and CEO Jeffrey Miller said in North America, the market for completion services softened, and in the fourth quarter customers indicated that budget exhaustion and seasonal issues would predictably impact activity.

Miller said he expected customer activity levels to decrease in the last six weeks of the year, and said the company would keep equipment utilized in the short term when it made business sense to do so, and take steps to position for a better 2019.

He said that the fourth quarter looks like a bottom.

Given the anticipated lack of customer activity in the fourth quarter, S&P Global Market Intelligence's normalized consensus fourth-quarter earnings outlook for Halliburton is 37 cents per share, down from 50 cents per share the previous quarter, while full-year results point to a rise in earnings per share from $1.22 in 2017 to $1.85 for 2018.

Jefferies analysts said Dec. 31, 2018, that from an investment standpoint it was an "awful" year for oilfield services. It was the third worst year on record for the oilfield service index, which was down 46%. The only worse years were 2008 and 1998, when the index was down 60% and 55%, respectively.

Bernstein analyst Colin Davies said Jan. 10 that the fourth quarter was particularly bad for Schlumberger and Halliburton, which were "now trading substantially below their 10-year EV/EBITDA averages and are below 2014 cyclical peaks even though the industry is very clearly still in recovery mode."

Schlumberger saw its stock price fluctuate in a 52-week range of $35.19 per share to $79.79 per share, with the stock at $41.70 per share on Jan. 10.

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Halliburton traded in a 52-week range of $25.14 per share to $56.83 per share, with the stock trading at $30.54 per share on Jan. 10.

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