NGI The Weekly Gas Market Report / NGI All News Access

Oil Service Providers Stung by Drop in North American Spending

Steep declines in North American drilling activity, especially in the Rocky Mountains, Permian Basin and Midcontinent, pushed down Halliburton's 1Q2009 earnings from a year ago and forced a 12% reduction to its U.S. and Canadian workforce, the CEO said last week. A sharp drop in U.S. gas drilling also sent Schlumberger Ltd.'s quarterly profits down 28%.

Separately, Raymond James & Associates Inc. said it now anticipates more declines in U.S. drilling through 2009.

The number of rigs actively searching for natural gas in North America continues to decline, according to Baker Hughes' rig count for the week ending April 24.

Following up the prior week's drop of 30 rigs, 18 more rigs packed it in, according to Friday's report, which leaves 742 natural gas-seeking rigs still on the job in the United States. The current low level of activity has not been seen in more than six years.

The count of rigs searching for natural gas in the country has dropped 54% since September 2008's peak of 1,606. The last time fewer rigs were searching for gas domestically was during the week ending Feb. 7, 2003, when 734 rigs were operating.

Natural gas futures prices are also at lows not seen in more than six years. Front-month natural gas futures put in a low for the down move of $3.275 on Friday -- a price level that hasn't been seen since September 2002. Friday's $3.297 close for May natural gas is 76% lower than last summer's $13.694 peak for front-month futures.

Halliburton, headquartered in Houston, said quarterly profit tumbled to $378 million (42 cents/share) from $575 million (64 cents) for the same period a year ago. Revenue was down 3%. Operating income from Halliburton's drilling and evaluation (D&E) business, which includes well completions and pressure pumping, fell 28%. North America D&E operating income in the quarter fell by almost two-thirds, or 62%.

Halliburton is North America's top provider of pressure pumping, which involves injecting materials such as water and sand into reservoirs to fracture rocks. Pressure pumping has been a key to successfully opening up U.S. and Canadian tight gas and shale plays.

"During the first quarter we experienced significant volume reduction and margin compression due to the steep downturn in North America drilling activity," CEO Dave Lesar said during a conference call Monday. "The first quarter brought unprecedented declines in the rig count and prolonged weakness to the commodity markets. These industry-wide declines have been exacerbated by restrictions to some of our customers' access to capital and the decrease in global demand for oil and natural gas."

Halliburton took its biggest hits onshore in the Rockies, Permian Basin and Midcontinent, said Lesar. "This has resulted in a decrease in the volume of activity leading to overcapacity and related price erosion on remaining work. As a result, we experienced a 53% year-over-year decline in operating income in North America. Due to the sharpness of the decline, we have taken proactive measures to reduce costs."

The international markets were "more resilient" in the quarter but some projects "are now being deferred, and the tightness in the credit markets continues to impact independent operators globally," the CEO said. "While integrated oil company and national oil company clients have not materially cut their spending, they are reevaluating the economics of their projects amid a lower commodity price environment."

Halliburton doesn't see an upturn anytime soon.

"Industry prospects will continue to be weak in the coming quarters, and visibility to the ultimate depth and length of this cycle remains uncertain," said Lesar. "However, we believe that the long-term prospects of the industry remain sound..."

Schlumberger CEO Andrew Gould said the "rate of decline in revenue in oilfield services accelerated considerably compared to the fourth quarter, largely due to the precipitous drop in the North American natural gas rig count..." Schlumberger has cut its workforce by at least 6% and more job cuts are expected through the year.

Schlumberger's "visibility on 2009 has not materially changed from the end of the fourth quarter," said Gould. "We do not see any significant recovery in North American gas drilling before 2010." Longer term, he said, "we remain convinced that any demand recovery for oil will need to be accompanied by increased investment to offset decline in the aging production base."

Raymond James energy analysts J. Marshall Adkins and John Fitzgerald last week once again revised downward their U.S. rig forecasts. They now forecast the U.S. rig count will bottom at around 700 rigs, or fall another 30% from here. The U.S. gas rig count "will bottom close to 500 rigs," or fall almost 70% from its peak last September.

The Raymond James analysts estimate year/year U.S. gas supply will be down about 6 Bcf/d by late 2009.

"A recent theme seen in the U.S. natural gas market has been the drilling but not completing of wells," wrote Adkins and Fitzgerald. This theme has become "increasingly popular" for several reasons: saving cash and eliminating well costs, the ability to hold leases by producing only a small portion of the gas, to wait for prices to recover, and limited takeaway capacity has prevented some completions and production.

"Industry sources indicate that as many as 1,000 wells were drilled but not completed in the first quarter," said the Raymond James analysts. "This equates to roughly 10-20% of the well count, and could delay 10-20% of expected new production (0.75-1.5 Bcf/d)."

For 2010, U.S. gas drilling and gas supplies "will depend largely upon what gas prices will be," said the duo. "Unfortunately, it is simply too early to tell what will happen to U.S. natural gas prices in 2010."

©Copyright 2009 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.