Oilfield services giant Halliburton (HAL) warned on third-quarter earnings Wednesday as customers face “budget exhaustion” while a transport backlog in the Permian Basin hits shale oil stocks. At the Barclays conference in New York, Halliburton CEO Jeff Miller cited pipeline bottlenecks, a tight labor market and inflation that created a worse-than-expected downturn in the Permian. These headwinds, plus delays on new Middle East contracts resulting in a slower-than-anticipated ramp up there, mean Q3 earnings per share will take a 8 to 10-cent hit, he said.
“This is a response to either budget exhaustion, in some cases, budget exhaustion along with take-away capacity,”
Miller said. “Either reallocating capital somewhere else which creates disruption, or in some cases, pulling back and saying, ‘We’ll get back to you. Halliburton expects bottlenecks in America’s busiest oil field to be relieved by the end of next year. Halliburton had warned earlier this year that budget constraints among customers and the pipeline bottleneck would result in a downturn in activity, but Miller said Wednesday that those trends are bigger than expected. The company is now seeing weakness in its pricing power across several basins due to a decrease in “customer urgency,” he added.
While oil production soared in the Permian, pipeline capacity hasn’t kept up, resulting in a glut of oil waiting to be transported out of the prolific basin. In June, the International Energy Agency said it believes take-away capacity from the Permian fields will “become insufficient by midyear, with a deficit possibly reaching as much as 290,000 barrels a day during the first half of 2019.” Despite the rally in crude prices, the pipeline crunch has forced producers to take lower prices for their oil than they would otherwise have fetched, hitting shale oil stocks. As a result, shale producers said last month that they are shifting well completions from the Permian Basin to their other oil assets due to the lack of sufficient pipeline capacity. Budgets will reload as the calendar flips to next year, and a host of new pipelines will open in the second half of 2019 to create more takeaway capacity. Noble Energy (NBL) said it would reduce Permian completions during the second half of the year and instead focus on the DJ basin.
They are also more reluctant to boost spending for drilling. EOG Resources (EOG) said it will only increase capital spending “with discipline.” Halliburton’s warning comes after Schlumberger warned on pipeline capacity at the conference on Tuesday. “These challenges will likely have a dampening effect on production growth, wellhead prices and investment levels in the coming year,” CEO Paal Kibsgaard said. But the issue will be resolved by the end of 2019. But until then, Kibsgaard said that producers will wait to complete wells until oil prices rise and more pressure-pumping fleets come online. Shares of Halliburton fell sharply on Monday as investors grew worried about demand for the company’s oilfields services slowing down in the Permian Basin, a key region for the company. Halliburton said some of its customers are reducing activity and lowering their rig count as production in West Texas and New Mexico outpaces the capacity at which crude oil can be transported out of the region, creating bottlenecks in the supply chain.
The bottlenecks have pushed the price of regional crude to a steep discount to benchmark U.S. oil and are threatening to dampen demand for oilfield services and equipment. It was a slightly nuanced comment from Miller, who said last month that he was trying to stay “less prescriptive on the timing of those catalysts.” The news sent Halliburton’s stock down by nearly 8 percent and was on track for its worst day since Nov. 28, 2014, when it dropped 10.9 percent. Halliburton was also the worst performing stock in the S&P 500. Despite the demand concerns surrounding the Permian Basin, Halliburton still sees future profitability in the area. “Tightness is an indicator of a great resource, and what is occurring in the Permian today is not new. In some ways, we’re a victim of our own success, as we develop longer laterals with better production. As a result, we expect this area to have temporary softness in the back half of 2018, but it’s poised to regain activity as a calendar turns to 2019 and additional pipeline capacity is available.” Jeffrey Miller, CEO at Halliburton, said in a conference call with analysts.
“We will manage through the year-end and be ready for the increased activity next year. I expect that these temporary efficiency drags will create headwinds for additional upward pricing in the third quarter. Our competitors’ new and uncontacted equipment is also creating pricing pressure in some areas. We will continue our efforts to optimize pricing and utilization, pursue continued technology implantation and control cost to maintain our industry-leading returns.”
Miller said. The company met analysts’ expectations for profit in its second quarter, earning 58 cents per share. Halliburton did however, beat revenue expectations, generating $6.147 billion compared with the $6.112 billion that was estimated. Halliburton’s revenue also rose 24 percent $6.15 billion in its second quarter compared to last year. “It will be a series of events throughout 2019 that occur,” Miller said. “But it’d be easy to see, as we finish the year, things being perfectly normal.” Halliburton shares were already under pressure before Monday’s big decline.
Through Friday, the stock was down 7.5 percent year to date. The Permian pipeline bottleneck continues to pinch the shale industry, forcing steep discounts for oil stuck in West Texas. Yet, the midstream constraints will be temporary and few in the industry are overly concerned. Despite the lack of pipeline space, production in Texas continues to grow. The EIA said that production in Texas jumped by 165,000 bpd in June compared to a month earlier, a very strong increase in output. That came even as reports of pipeline constraints had already begun to crop up, and discounts for oil in Midland had started to rise. So far, there are indeed some signs of a drilling slowdown. The rig count has been flat since June and the discounts have steepened. The backlog of drilled but uncompleted wells continues to rise as completion activity has slowed, which is an outgrowth of midstream bottlenecks. A series of catalysts will drive drilling and fracking activity in the Permian basin of West Texas and New Mexico throughout the next year, Jeff Miller, CEO of the world’s biggest fracer, said during a interview on Monday.