North America’s onshore drilling activity continued to lift Halliburton in the second quarter, with profits up by 54% from a year earlier, the company reported Monday.

Earnings hit $739 million (80 cents/share), up from $480 million (53 cents) in 2Q2010. Revenue climbed 35% to $5.9 billion. Wall Street had pegged quarterly earnings of 74 cents/share on revenues of $5.7 billion.

“We have for some time expressed confidence in the strength of the North America cycle, and our results this quarter validate our positive view on the market,” said CEO Dave Lesar. “Strong crude prices, operators’ improved cash flows combined with their ability to access capital and the increasingly liquids-rich nature of the United States land market, give us continued confidence in the strength of North America through 2012.”

Halliburton’s operating margin in the second quarter was “the highest it has been since 2008,” he said.

North America revenue jumped 16% sequentially compared to U.S. rig activity growth of 6%, with incremental operating margins hitting above 50% for both divisions. The surge in activity was “driven by the execution of our North America growth strategy in liquids-rich basins, and our customers’ continued adoption of our integrated solutions,” the CEO explained.

Hydraulic fracturing services continue to be red hot in the U.S. onshore, Lesar said.

“Overall, growth in the demand for our services has outpaced capacity additions and we expect this imbalance to continue going forward,” he told analysts.

Natural gas drilling services in North America fell 2% in the quarter from the period a year ago but the market remains “relatively resilient, spurred by the increased demand for power generation due to the substitution of natural gas for coal and harsh summer temperatures in various regions,” said the CEO.

Halliburton is “a bit cautious” about activity in onshore dry gas drilling basins. However, a plan instituted last year to help customers control prices has paid off, Lesar said. Halliburton last October moderated some of its prices in the dry gas plays and made commitments to some of its key business customers not to “chase higher pricing” in more oily and liquids-rich plays (see Daily GPI, Oct. 19, 2010).

“Last year we discussed our strategy of staying with our dry gas customers and not moving equipment elsewhere,” Lesar explained. “While we did sacrifice some margin opportunities at the time, some of them critical, I believe that the strategy is starting to pay off. We are now seeing only a small difference in the operating margin in the dry gas plays versus the liquids-rich shale plays.”

Activity in the deepwater Gulf of Mexico (GOM) gained strength in the first half of the year but there are concerns that won’t be sustained in the last six months.

“The deepwater Gulf is continuing to recover due to the resumption of permits,” said Lesar. “The currently approved permits are heavily weighted to the large operators and there is strong incremental drilling and completion services…higher than average activity.”

Halliburton managed to score contracts on eight of the 18 new permits issued for deepwater activity in the GOM, but “the pace of permit issuance has slowed again and the fact that some of the initially permitted wells are nearing completion creates a risk that the Gulf recovery could slow or stall in the second half of 2011,” he said.

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