Wall Street has decent expectations for Halliburton after 4Q14 earnings (Part 12 of 15)

(Continued from Part 11)

1Q15 can be difficult for Halliburton

In the previous section, we saw how the oil industry is softening due to the depressed crude oil price. In this article, we’ll analyze how Halliburton may be affected in the short and medium term through the interplay of various factors.

In North America, Halliburton (HAL) expects the effect of the falling crude oil price to be more severe in 1Q15, particularly in the United States. This was evident from the views of Halliburton’s management. In its 4Q14 conference call, Halliburton’s management disclosed, “Price discount discussions with customers did begin in the fourth quarter and have accelerated over the last past several weeks and price reductions are now occurring across all product lines.”

The crude oil price decline and resulting price concessions can affect Halliburton most severely in 1Q15. This is because the effect of price concession or discount affects revenues immediately. In the medium term, an oil price drop can also affect production volume, although the effect on volumes can vary.

Delay in realizing efficiency savings

Halliburton (HAL) expects to partially offset the negative effects of low crude oil price through cost savings efforts. Such saving can come in the form of the following:

• lower input cost

• labor rationalization through headcount reduction

However, such cost restructuring efforts have lead time and can boost Halliburton’s net income with a delay. Investors may also invest in the Market Vectors Oil Services ETF (OIH), of which Halliburton makes up 11.6%. Other oilfield service companies such as Schlumberger (SLB), National Oilwell Varco (NOV), and Cameron International (CAM) also expect to reduce the negative effects of the crude oil price fall through better efficiency and application of technology.

International business affected

Since the last quarter of 2014, the crude oil price fall has led to capital spending cuts by some of the major energy upstream players. Energy prices can hurt Halliburton and other companies. As a result of the market decline, Halliburton’s international business was negatively impacted in 4Q14. It incurred $129 million of restructuring charges in 4Q14 consisting of severance-related costs and asset write-offs.

The majority of these adjustments related to Halliburton’s Eastern Hemisphere business. In 2015, Halliburton expects the sharpest cut in activity in its Europe, Africa, and CIS regions, while it expects the Middle East and Asia to be the least affected.