Halliburton, Bracing For Earnings (HAL, BHI, SLB, KBR)

Halliburton (NYSE:HAL) plans to release its second quarter earnings on Monday morning, and as of the end of the week the First Call estimates are $0.56 EPS on nearly $3.5 Billion in revenues. The completion of HAL’s spin-off of KBR (NYSE:KBR) has already been priced in to the stock, of course, and HAL has already announced a dividend of $0.09/share for the third quarter and a very recent increase of $2 billion to the company’s stock buyback program.  The buyback plan has been helping shareholders over the last 90 days, with shares having risen from under $32.00 to over $36.00. Halliburton is also one of the few oil and gas services operators that has not seen a total break-out of its stock, as shares traded above $40.00 in early 2006.

In the first quarter, HAL’s largest division, Production & Optimization (P&O), took in $141 million more than it did in the same quarter of 2006, but its operating income dropped from year ago levels by $8 million. In the company’s 10-Q, HAL blamed North American repair and maintenance costs, lower natual gas prices, and the weather for the drop in income. The division rakes in nearly 40% of HAL’s revenue and more than 40% of its operating income, and North America contributes more than 50% of revenue and about 70% of operating income to the division.

The point is natural gas prices were still soft in the second quarter, repair and maintenance costs in North America didn’t get any cheaper, and the weather got warmer. None of that is going to help the P&O group’s business for the quarter and it’s doubtful that their drilling division, which grew its income by 43% in the first quarter, can keep that up. Rig counts for the US were up by more than 200 y-o-y in the first quarter of 2007, and down by more than 130 in Canada in the same period. That probably mitigates the softness in Canadian operations somewhat, but not enough to cover for the softness in P&O.

Baker Hughes (NYSE:BHI) took a nasty whack last week when it issued guidance lowering its earnings estimates, primarily because of problems in Canada. HAL has all the same problems in its largest division. Schlumberger (NYSE:SLB) avoided the Canadian malaise and reported big numbers today, more than a dime per share higher than expectations.

As a reminder, Halliburton is one of Jim Cramer’s "Top 9 for 2007," so he’ll be giving this one a lot of public attention this week one way or the other.

Paul Ausick
July 22, 2007