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North American Onshore Well Services Catching Up With Demand, Schlumberger Says

Pressure pumping services in North American unconventional basins appear to be on the cusp of oversupply, Schlumberger Ltd. executives said Friday.

CEO Paal Kibsgaard told financial analysts during a conference call that during the third quarter there was a "modest drop" in pressure pumping pricing in natural gas basins, as well as price "flattening" in liquids-rich basins. Overall, prices climbed "slightly," but he said there are "concerns" on the horizon.

"I'm not saying it's going to happen in the near future," he said. "During the third quarter we saw a flattening in liquids-rich basin pricing, which we hadn't seen in recent quarters. There's a significant amount of horsepower coming in as we speak. My concern on the North American outlook is what will happen to pressure pumping pricing" in the months to come.

The concerns are a sharp contrast to comments made during the second quarter conference call. At that time, Chairman Andrew Gould, who also was on the call Friday, said "pricing power in North America pressure pumping remained robust, but more importantly toward the end of the quarter it became clear that pricing traction for certain other services -- particularly those related to drilling high-risk deepwater plays or other complex developments -- was in place both in North America and internationally. This is not yet universal, but a positive trend is in place which should yield results by the end of the year" (see Shale Daily, July 25).

Nothing dramatic has changed but there is a shift, Kibsgaard said.

"We see basically a higher level of uncertainty" in North America. "We're quite positive on Canada and Mexico and we expect them to be quite strong for next year. Our main uncertainty is around pressure pumping pricing linked to horsepower capacity that is coming into the market and there's some concern on cost inflation."

Trying to predict when horsepower needs will balance is difficult, he said. "Obviously, if there's a flat rig count it will happen sooner, but we don't know when. The impact on pricing is a function of when it happens when we think it's going to happen before saturation. We look at our plans and we are at this stage continuing to add horsepower and we will continue until we see an actual change in the market...in customer plans or utilization of assets.

"We haven't seen anything in terms of these changes yet and we are continuing to add market share...but it eventually will happen."

The company "still is seeing some latitude in pricing" within its drilling and wireline units. However, as the oil and gas rig count in North America's onshore flattens -- as Schlumberger expects in 2012 -- "I think what's more interesting is what may happen to pressure pumping pricing as we approach more equilibrium...We are doing what we can to manage cost inflation. What's more dominant and important is what happens to pricing on pressure pumping going forward."

Gould said "what customers dislike most is uncertainty." For Schlumberger, there appears to be less uncertainty overseas, he said. "We have to assume before 2012 starts that the European Union will come to some sort of resolution on the sovereign debt crisis. Couple that with the fact that the [oil and gas] supply situation is the tightest it's been since 2006; it's certainly tighter than 2008."

As to what contraction in the market might do to capital expenditures (capex), Kibsgaard said Schlumberger is taking a wait-and-see approach.

"Our original plans for 2012 were looking to add from '11 levels," he said. "We are maintaining capacity to add both from the supplier and manufacturing standpoint from global capex. To what extent we may add, it comes down to customers. Generally we are maintaining capacity to add capex going into 2012. It generally will be higher, but to what level higher, we'll have to come back to that in a quarter's time."

Schlumberger has been moving away from "pure horsepower" as it uses technology to create a "drill perfect" solution. Earlier this year Kibsgaard said the "brute force" drilling process that had unlocked the shale deposits was hard on equipment.

"It's important to start by saying that when we said the industry had used brute force and ignorance, we never imagined that hydraulic fracturing [fracking] would disappear," said Gould. "A more proper characterization is to reduce the necessity to correct the IP [initial production], eliminate waste..."

Schlumberger has developed several technologies that have been embraced by onshore drillers, in particular its HiWAY flow-channel fracking system. "We're working on other things as well. In particular, to do a better frack with less chemicals, etc...

"Not for a minute do we think the technology just applies to characterizing the work flow," Gould said. "We're also working on pressure pumping and completion. It's a suite. It's a big step forward. In fact, we now have a unique seismic spread in North American that's beginning to show appreciation for proper characterization before fracking, which can save a lot of money."

Whether the company figures out ways "to reduce only propellant or water or horsepower, it's a function of how we design jobs and what a new technology would replace," said Kibsgaard. "It's clearly an evolving technology. We are putting a lot of effort into the application range, a lot of effort into how to design jobs and how to make [technology] more effective...and provide more production for less...We're very optimistic with our customer base. Any new technology, particular North American land, takes time to penetrate. We are starting to get some traction."

The Houston-based company reported 3Q2011 revenue of $10.23 billion, up from $6.85 billion in the year-ago period and ahead of 2Q2011 revenue of $9.62 billion. Income from continuing operations attributable to Schlumberger, excluding charges and credits, was $1.32 billion, 12% higher sequentially and 51% year/year. Diluted earnings per share from continuing operations, excluding charges and credits, were 98 cents, up from 70 cents a year ago and more than the 87 cents in 2Q2011.

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