The earnings season for North America’s oil and natural gas companies kicks off Monday with Halliburton Co., and analysts will be tuned in for signals about where capital spending is going in 2012. Many admit that it’s been difficult to get a fix, in part because of global economic turmoil, but also because of relentless domestic natural gas production.

For the most part commodity markets have been reacting to the global turmoil, and crude oil inventories and gas injection volumes have kept “prices bouncing around,” said Parks Paton Hoepfl & Brown Managing Director G. Allen Brooks. There are “increased concerns about future economic growth, as highlighted by the International Monetary Fund’s reduced forecasts for U.S. and global economic growth in 2011 and 2012…These reduced economic growth estimates suggest the key to any recovery in natural gas prices in the near term will depend on falling supply growth rather than a demand increase.”

In fact, industrial demand for gas is growing at its slowest pace in three years because of a decline in U.S. manufacturing capacity, according to the Department of Energy (DOE). Industrial gas use now is on track to gain by only 0.8% in 2012, which would be the smallest in two years when consumption declined during the recession, the data indicated.

Gas demand among manufacturers in the coming year is forecast to be 21% below the high reached in 1997. Meanwhile, domestic gas production is on course to jump 6% this year to an all-time high of 65.66 Bcf/d, the DOE said. In addition, gas prices have plunged 21% this year and were down 16% in 3Q2011, which was the biggest decline since 1Q2010.

U.S. gas supply growth has been “simply astonishing,” said analysts with Bank of America. In parts of the Marcellus and Eagle Ford shale plays, they said, the break-even price for gas production has fallen below $3/MMBtu because of improved technology and higher crude prices,which support gas production. However, if the U.S. economy were to fall into another recession, they warned that gas demand could contract by 0.1 Bcf/d in 2012, compared with a base case of 2.3 Bcf/d expansion.

The outlook for E&P capital spending in 2012 is elusive, said FBR Capital Markets analysts Rehan Rashid and Saurabh Lele, who are looking for answers to a series of questions.

“We believe the relevant questions in the marketplace include: Who can balance growth while protecting the balance sheet? Who has lined up the above ground infrastructure, including takeaway capacity? When does a slowdown in E&P activity happen, if at all? What is the direction of unit cost structure? Who is improving recovery factors?

“We expect the shale rig count (oil and gas combined) to nearly double to, approximately, 1,000 rigs by 2015, from about 500 rigs in 2010,” said the FBR duo. “As such, we do not expect service cost pressure to abate anytime soon.”

Barclays Capital’s analysts are expecting the majors and large producers to report slightly lower quarterly earnings than expected — but they still are forecast to be higher than year-ago reports. In a review of 19 major integrated producers based in the Americas, the analysts are forecasting earnings to total $41.1 billion, down from total earnings for the group in 2Q2011 but up 32% from 3Q2010.

Chevron Corp., which is scheduled to issue its earnings news later this month, said in an interim quarterly report profits in the latest period would be “comparable” with those in 2Q2011.

Meanwhile, Tudor, Pickering, Holt & Co. (TPH) analysts don’t expect any big surprises from the E&P sector overall — large or small companies.

“Overall 3Q2011 is expected to be ho-hum for the group and we don’t see many big beats or misses,” analysts said in a note to clients.

Some companies might be wise to change their strategies, Brooks suggested. Domestic E&Ps “have been obsessed with capturing as much land as possible in the gas shale plays” but with the land grab came drilling and production obligations that drove spending higher. “For many companies, the ability to finance this game in the face of weak gas prices and rising drilling and completion costs outran cash flow generation forcing them to hedge future gas production, enter joint ventures and tap capital markets.”

The earnings expectations for oilfield services companies in 3Q2011 is clearer because the U.S. land market has remained “quite strong” in recent months, said FBR Capital’s Robert Mackenzie, James Woods and Megan Repine.

“Nevertheless, this quarter’s earnings will matter far less than normal as investors grapple with the current macroeconomic uncertainty and prospects for 2012,” said Mackenzie and his team. “Restrained E&P capital budgets in the event of a recession could drive overcapacity in 2012. That said, our channel checks suggest oil service providers have yet to see material changes in customer behavior.

“Furthermore, the recently announced merger between Complete Production Services and Superior Energy Services — despite heightened macroeconomic worries — is another bullish indicator for the industry” (see related story).

The TPH team offered its forecast for oilfield services on Friday but said Halliburton’s (HAL) results may not provide a “catalyst either way” for trends going forward because expectations are built in for the U.S. market to do well while international results are forecast to be “muted.” However, “lots of watching how HAL trades since that theme of strong U.S. [results] likely persists through earnings season.” North American results “should continue the upward path…but pricing gains are restrained as the market remains competitive…”

Jefferies & Co. analyst Judson Bailey reduced his 2012 earnings forecasts and price targets by 30-50% for some of the biggest domestic onshore drillers and well service companies because he expects to see slower growth in the rig market. The U.S. land rig count by the end of 2012 should be about 1,925, which is down from a previous forecast of 2,100 rigs, said Bailey. There are about 1,824 land rigs now in operation across the United States.

Unlike the extreme onshore rig decline in 2009, Bailey predicts that the falloff in rigs next year will mimic 2007, as expansion in some of the more active shale plays, like the Marcellus and the Eagle Ford, offset declines in conventional fields.

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