Halliburton Earnings Surge, But Services Sector Has Risks Ahead (HAL, SLB, BHI, WFT, OIH)

Oil field services firm Halliburton Co. (NYSE: HAL) reported EPS of $0.61 for its first quarter, more than double its profit in the same period a year ago. Revenue reached $5.3 billion, compared with $3.8 billion a year ago. Analysts had been expecting EPS of $0.58 on revenue of $4.89 billion. Going forward, however, the company noted a few issues it has to deal with, and the entire sector may be heading for an adjustment.

Halliburton is the first of the services firms to report, with Schlumberger Ltd. (NYSE: SLB) and Weatherford International, Inc. (NYSE: WFT) due on April 21st, and Baker Hughes Inc. (NYSE: BHI) due on April 27th. The EPS estimates for all these firms have been revised downward more often than they have been revised upward in the last 30 days, and estimates for the second quarter are also being pushed lower.

Schlumberger is now expected to post EPS of $0.77, up 24% from the same period a year ago, on revenue of $8.84 billion. A month ago Schlumberger was expected to post EPS of $0.83, and in that time period EPS was revised downward eight times compared with one upward revision. For the second quarter, EPS has been revised from $0.92 to $0.90 in the past month.

Baker Hughes is expected to post EPS of $0.78, a jump of 81% over the first quarter of 2010. Revenue is expected to total $4.28 billion. A month ago, Baker Hughes was expected to post EPS of $0.79. During the 30 days, EPS was revised downward four times and upward just once. For the second quarter, EPS has been revised from $0.85 to $0.86 in the past 30 days.

Weatherford is expected to post EPS of $0.18, a whopping 300% jump over the $0.06 EPS it posted a year ago. Revenue is expected to total $2.84 billion. A month ago, Weatherford’s EPS estimate was pegged at $0.19, and during that period it has been revised downward four times and upward only once. For the second quarter, EPS has been revised from $0.24 to $0.21 in the past month.

The cautious forecasts on earnings are related to a number of factors. First, the weather gets some blame for the decline for the first quarter. Cold and snow in the US have slowed down some projects, and heavy rains in Australia have delayed drilling there as well.  Thomson Reuters has a detailed internal research audio-video highlighting more of the risks for the oil services sector.

Second, political unrest in Libya and elsewhere in the Middle East and North Africa is slowing work there. Third, the delay in restarting drilling in the US Gulf of Mexico is having an impact as well.

Fourth, the rising price of crude, and ultimately gasoline, is causing consumers to drive less. We saw this effect back in 2008 when gasoline prices rose to levels equal to what consumers are paying now. For the services companies this means that new drilling could taper off as demand falls and E&P companies cut back on new drilling.

Working in the drillers’ favor, of course, is the boom in shale gas drilling onshore in the US. That is not likely to slow down much, mainly because leaseholders have to drill in order to maintain their leases.

Based on today’s opening price and the stocks’ median price target, Halliburton’s upside is indicated at about 21%, Schlumberger’s upside is indicated at about 24%, Baker Hughes’ at about 20%, and Weatherford at about 26%. Given the number of issues weighing on estimates, it wouldn’t be surprising if these targets are adjusted downward as well.

Halliburton shares are down about -1.5% in very early trading, to $45.93, within a 52-week range of $21.10-$50.74. The Oil Services HOLDRS ETF (NYSE: OIH) is also down nearly -2.5%, to $152.67, in a 52-week range of $89.48-$167.37.

Paul Ausick