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Will Halliburton’s North American Operations Underperform in 4Q15?

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Halliburton’s North America revenues and income

In this part, we will discuss Halliburton’s (HAL) geography-wise revenue and operating income contributions. From 3Q14 to 3Q15, Halliburton’s revenues from North American operations decreased 47.3%. In comparison, revenues decreased by 22% during the same period in its International operations, which cover operations outside North America.

In 3Q15, Halliburton’s Middle East operations recorded increased operating income compared to 3Q14. Its Middle East and Asia region recorded a 14% growth.

Operating income from North America, on the other hand, was nearly wiped out. The region registered 99% decline in operating income from 3Q14 to 3Q15. The North America region witnessed operating income crash even on a sequential basis. From 2Q15 to 3Q15, its operating income declined 94%.

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Why North America may continue to fare badly

From 3Q14 to 3Q15, Halliburton’s North American operations have lost share of its total revenues (54% versus 45%). North America operations suffered primarily due to sharply lower rig counts in the US over the past year. Depressed crude oil prices have led to 24 oil and gas rigs being idled in the US alone from July to September, which is a 3% decline in total US rigs. In comparison, the US rig count increased 3% during 3Q14.

According to Halliburton’s acting CFO, Christian Garcia, its 4Q15 North America operation may continue to be “challenging and difficult to predict” because upstream operators’ borrowing capacity has decreased. In the company’s 3Q15 conference call, Garcia added, “If these headwinds play out, we estimate that the fourth quarter average horizontal rig count could drop about 15% to 20% sequentially. We expect our North America revenues and margins to decline, but we anticipate sequential decrementals to be only in the mid-teens due to our cost reduction efforts.”

Comparing Halliburton’s geographical operations

Halliburton constitutes 2.1% of the Vanguard Energy ETF (VDE). Compared to Halliburton, Baker Hughes’ (BHI) revenues from North America in 3Q15 declined 57% from 3Q14, while revenues from its international operations declined 25% during the same period.

Baker Hughes is Halliburton’s smaller peer, with ~$24 billion market capitalization. Halliburton’s current market capitalization stands at ~$33 billion.

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