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Halliburton: Plump Storage to Soften Recovery

While the outlook for North American natural gas activity remains cloudy, executives at Halliburton said last Monday they expect margin compression to continue at the drilling services firm, although not as severely as what was seen in the first two quarters.

"Working natural gas storage continues to be ahead of its normal seasonal patterns, which suggests that despite reduced drilling activity, the supply curtailment of gas production has not yet caught up with lower demand," Halliburton CEO David Lesar told financial analysts during a second quarter earnings conference call.

Lesar said the fact that working gas storage could reach record levels by the end of injection season signals that "any recovery in gas drilling is likely to be relatively modest for the remainder of 2009."

To counter the downtrend, Halliburton leveraged the industry's shift toward more service-intensive resources, such as unconventional gas plays, and was able to grow market share and revenue per rig despite a 25% decline in North American revenue, Lesar said. Overall, revenue of $3.5 billion in the second quarter represented a decline of 11% from the first quarter, driven by the North American decline.

"The number of rigs operating in the major unconventional plays has climbed and now represents over 40% of total rigs in the U.S. Price erosion, of course, continued in the second quarter, and we believe pricing will remain fluid until activity stabilizes. Pricing declines, however, appear to be decelerating. We still anticipate that we will see some margin compression in the third quarter, but it will be driven more from lower activity than continued pricing erosion," Lesar said.

CFO Mark McCollum pointed out that the company's well construction and product service lines continue to benefit from more horizontal drilling, notably in the Haynesville and Marcellus shales. "The proportion of horizontal-directed drilling continues to increase and currently represents 43% of total rig count," he said.

Like its peers, Halliburton is engaged in the exercise of resizing its fleet for next year and beyond as the marked decline in the U.S. rig count by 55% from its peak "has led to a significant oversupply of all types of equipment in the market," noted Tim Probert, president of the company's drilling and evaluation division.

"Resizing our fleet for 2010 is a pressing issue, and we have an active program to address absorption of this capacity through a retirement program," Probert said. "We expect to retire and remove from service approximately 10-15% of our pumping and wireline fleets this year, depending on the product line."

Halliburton's second quarter net income of $262 million, or 29 cents/share, was off 48% from the year-ago period when net income was $504 million, or 55 cents/share.

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