Halliburton Implied A 'Bathtub' Recovery

Although Halliburton Company HAL reported beat results for Q2, Credit Suisse’s James Wicklund noted that the recovery wasn’t as robust as investors had hoped.

Wicklund maintains an Outperform rating on the company, with a price target of $49.

Lower-Than-Expected Recovery

The analyst mentioned that while the commentary was positive, “Q2 was confirmed as the earnings trough” and that “more of a ‘bathtub’ rather than a ‘V’ shaped recovery was implied.”

It had widely been expected that the next incremental horsepower to be implemented would lead to a 20–30 percent price bump, since no company would want to put out more equipment at a loss.

Related Link: Argus Capital Positive On Halliburton, Still Likes The Story

However, Wicklund pointed out that this belief “misses that higher utilization of working equipment occurs before incremental capacity is added.”

This means that the current equipment would be made to work up to 24/7, meaningfully increasing utilization with only minimal variable cost.

According to the Credit Suisse report, “Only 4-plus million horsepower of pressure pumping capacity has left the market versus the 5 million for which many investors hoped.”

Looking Forward

Wicklund expects activity to ramp slowly in 2H16 and continue to improve through 2018. The analyst also believes Halliburton will take on cost cuts in Q3 to ensure Q2 is the earnings trough.

Although there has been almost no increase in activity thus far in July, “HAL has positioned itself to benefit disproportionally on the recovery, regardless of pace, which is the best and most a company can do.”

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