Demand for oilfield services from North America's unconventional resource drillers continues unabated and Halliburton Co. could complete contracts "in any terms we wanted to dictate at this point in time," CEO Dave Lesar said Monday.
Speaking to financial analysts during a conference call to discuss first quarter earnings, Lesar said the North American land unit's solid performance helped the Houston-based oilfield services provider to overcome harsh winter weather and geopolitical upheaval.
"There's no mistaking our view going into the discussion," Lesar said of North American onshore business. "There's clearly room for operating earnings and revenue to grow as we get further into 2011..." He feels "more confident of the resiliency" in North American activity through the end of the year than he did in January.
Halliburton's North American onshore rig business was up 2% in the first three months of 2011 from the final period of 2010. And the business was stronger despite "abnormally harsh weather in the Midcontinent, the Rockies and particularly the Bakken [shale], where we have a disproportionate amount of work," he said.
And there's plenty of onshore drilling and completion work to come.
According to Halliburton estimates, there were 3,500 uncompleted wells in the U.S. onshore at the end of March. The company expects to "work off some of that backlog in the second quarter" but it will depend on what customers want and need, said the CEO.
"We could contract out most of the capacity in any terms we wanted to dictate at this point in time," he told analysts. For now "we're keeping the contracts relatively short and not doing any fixed-price contracts."
With all of the work on its plate Halliburton has begun to transition from fixed-price contracts to performance-based contracts.
"We're very much driving toward incentive-based contracts," said Tim Probert, president of Strategy and Corporate Development. "We've invested quite a bit in the last couple of years in developing efficient work flows...stitching together all of the elements. It's a key value proposition...and making it much easier to sell for us by engaging in incentive contracting...
"Today we're very much focused on time-based efficiencies, primarily in the well-construction phase. Over time, we'll have the potential to evolve to production-based efficiencies too."
Meanwhile, the "shift to oils is unabated," said Lesar. Halliburton's oil rig count in the first three months of 2011 jumped 11% from the year-ago period, while the gas rig rate declined by 5%. Gas-directed drilling is down around 10% from last summer, he said.
"Horizontal oil represents the fastest growing segment of the market today, up 170% over the prior year," said Lesar. "The structural change to oil and liquids-rich reservoirs has favorable implications to the overall business...Longer laterals, more complex fluids, increased volumes are driving the service industry compared to dry gas areas..."
Onshore gas drilling is expected to remain under pressure, even with the shift to oil and liquids, noted the CEO.
"Gas produced with oil and liquids will inhibit the correction of the oversupply situation," he said. However, "any curtailment will be more than offset by an increase in liquids-directed activity."
Halliburton's activity in oil and liquids-rich plays "tends to be more complex, and the shift to these resources continues to persist...I feel even more confident of the resiliency of North American activity through the end of the year than I did at the beginning of the year."
Pressure pumping and utilization levels in the first three months of this year "passed those of 2008," said Probert. "We're seeing it across the board, whether it's pressure pumping, completions...It's an across-the-board phenomenon."
The onshore services industry is "evolving in a significant way as we complete more oil wells versus dry gas. There's an increased degree of complexity, and the underlying [oil] commodity price allows you to drill longer laterals, more complex stages...it's driving the service intensity relative to dry gas."
Geopolitical turmoil "is forcing customers to look to more stable markets, like the United States, and we could see an acceleration of spending," said Lesar. "We have a bias in increased activity on U.S. land through 2011 and confidence in North American margins through the rest of the year."
Inflation has begun to creep into costs for labor, chemicals and equipment, which is slowly moving up pricing, CFO Mark McCollum told analysts.
"Our general view is that capacity is being fully absorbed by the increase in service intensity, horsepower per job, the increase in the number of 24-hour operations," McCollum said.
"The environment is still ripe to continue to move pricing. We are continuing to do that and more than covering cost inflation...[which is] also pushing against us. We still believe we can move margins forward in North America."
Probert said "all elements of North American inflation are kicking in...labor, transportation, you name it."