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Halliburton Operations in Sticky Situation

North American margins for Halliburton Co. likely have been impacted "more than anticipated" in the second quarter because of the increased cost of guar gum, an additive used in hydraulic fracturing fluids, the oilfield services company said late Wednesday.

"As a result of the recent rapid expansion of oil and liquids-related activity in North America, Halliburton has experienced increased costs for guar gum, an agricultural commodity used as a blending additive to its fluids utilized in hydraulic fracturing," the Houston-based operator said. "The price of guar gum has inflated more rapidly than previously expected due to concerns over the potential for shortages for the commodity later in 2012. As such, the costs have impacted the company's second quarter North America margins more than anticipated."

Halliburton now expects North American margins in 2Q2012 will be impacted "300 basis points more than its previous guidance of 200-250 basis points, for a total impact of 500-550 basis points lower" than 1Q2012 levels. The operator set the previous guidance in April (see Shale Daily, April 20).

CFO Mark McCollum said in April that because of high service costs resulting from North American producers moving from dry gas plays into more liquids-rich and oily basins, Halliburton anticipated margins by the end of this year "could drift toward the low-20% range..." Halliburton already is delaying some of its planned 2012 pressure pumping deliveries in North America to 2013 to deal with "inefficiencies" from the changing production targets. McCollum had told analysts that "with the exception of guar, we anticipate some relief from suppliers" on costs in the second half of this year.

"Though the company believes these increased costs [for guar] are transitory once new supplies are available in early 2013, the company is seeking to mitigate these costs in the second half of the year through seeking relief from customers and increased usage of synthetic and other guar alternatives," Halliburton said.

An analysis issued late last month by PacWest Consulting Partners found that guar gum prices had "skyrocketed" in the past year, mostly because of high U.S. oilfield demand (see Shale Daily, June 1). India supplies more than 70% of the global guar market, and based on its analysis of India's market, PacWest determined that there would be a "high probability of intermittent guar shortages over the next six months."

Halliburton's operating margin, which was as slim as 1.7% less than three years ago, ballooned to 32.5% in 3Q2011 before slipping to 29.9% in 4Q2011 and 27.4% in 1Q2012, according to NGI's Shale Daily calculations based on company documents.

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