Portfolio holding Halliburton (HAL) reported stronger-than-expected first-quarter results before the bell Tuesday, validating our investment in the oilfield services company as it capitalizes on years of underinvestment in drilling capacity.

• Total revenue rose 33% year over year to $5.68 billion, topping analyst expectations of $5.5 billion, according to Refinitiv.

• Earnings per share (EPS) more than doubled on an annual basis, to 72 cents, exceeding the Refinitiv estimate of 68 cents.

Summary

Halliburton’s results — and management’s associated commentary — strengthened our conviction in the company. In addition to its top-and-bottom line beats, Halliburton also posted better-than-anticipated operating margin and operating cash flow.

It wasn’t all perfect. Halliburton’s free cash flow disappointed, and that's probably why the stock is trading down in today's session. A few factors could be motivating the sellers. Crude prices fell more than 2% Tuesday, which is helping make energy the worst-performing sector in the S&P 500 on a down day for the index. 

Halliburton CEO Jeff Miller stressed there’s been no change to the company’s longer-term expectations around strong free cash flow generation, which supports capital returns to shareholders via dividends and buybacks. “Everything I see today points to more cash to shareholders,” Miller said on Tuesday’s earnings call, expressing the sentiment on multiple occasions during the presentation and Q&A with analysts.

Guidance

Halliburton’s overall outlook is constructive, as Miller said the company continues to expect customer spending to grow in 2023 and beyond. In North America, specifically, he reiterated that customer spending is on track to grow at least 15% this year.

“At today’s oil prices, I believe that our customers will execute their activity plans and the market for highly efficient equipment and quality services will remain tight,” Miller said. He added there’s been no change to his belief that a multi-year boom is underway for oilfield services firms.

On a segment-by-segment basis, Halliburton CFO Eric Carre said its revenue from drilling and evaluation should increase sequentially in the low-to-mid single digits in the second quarter, with a slight decline in margins driven by seasonal weakness in software sales. Completion and production revenue also is expected to grow in the low-to-mid single digits sequentially, alongside between 25 basis points and 75 basis points of margin expansion. A basis point equals 0.01%.

Capital return initiatives

Halliburton bought back $100 million worth of stock in the first quarter, which follows $250 million worth of share repurchases in the final three months of 2022. As a reminder, in January, Halliburton announced a new framework to return at least 50% of annual free cash flow via dividends and buybacks going forward.

Halliburton now pays a dividend of 16 cents per share, up 33% from where it stood at the end of last year. Miller stressed Tuesday that Halliburton has the flexibility to increase its buyback spending as the year progresses.

Halliburton’s first-quarter sales were better than expected in all four of its geographic segments. Its North American and Latin American operations saw the biggest year-over-year growth, rising 43.6% to $2.77 billion and 40.1% to $915 million, respectively.

The only geographic segment that saw declines on an annual basis was Europe/Africa/CIS, which fell 2%. Management noted on the call that those results were impacted by the sale of its Russia operations.

Halliburton’s free cash flow came in at negative $105 million in three months ended March 31, compared with estimates of positive $134 million. It’s important to remember the weakness is largely due to normal seasonal trends, a dynamic also impacting Halliburton rival SLB, which last week reported negative first-quarter free cash flow, too.