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North America Oil, Gas 'Scraping Bottom,' But Downturn Not Over, Says Halliburton

Halliburton Co.'s management team on Monday said it may be 2016 before there's an upturn in North America's oil and gas markets, with more pain expected through the second half of this year.

Second quarter profits for the Houston oilfield services (OFS) giant, the No. 2 provider in the world, fell 93% year/year. Total company revenue declined 16% sequentially, but in North America, where it's the No. 1 pressure pumper, revenues slumped by 25%.

The "pricing pressures may be nearly over" for the OFS sector, but the outlook is murky at best, said CEO Dave Lesar.

"We expect the second quarter has been even more challenging for those of us in the industry," Lesar said during a conference call early Monday. "As a result, we believe many of the smaller service companies are now operating below cash breakeven levels, which leads to the conclusion that pricing cannot stand these levels for an extended period."

A "modest uptick in activity during the second half of this year" is possible, including increased refracturing activity. "However, we are not expecting any meaningful activity increase until sometime in 2016, depending on the pace of production declines, and where commodity prices settle out in the coming quarters.

“Therefore, what we are continuing to do is manage our costs, service our customers that are engaged in this flight to quality," and continue to prepare for the merger with Baker Hughes Inc., which is set for completion by the end of the year (see Daily GPIJuly 13).

From what management can ascertain, the North American rig count is set to decline through at least September, Acting CFO Christian Garcia said.

"In North America, if we extrapolate the current rig count forward, it suggests that the average rig count for the third quarter should decline by at least 5% compared to the prior quarter," he said. "This, in combination with a full-quarter impact of lower pricing, leads us to believe that revenues and margins in the third quarter will be under pressure.

"This pattern is consistent with previous cycles, where we typically see at least a one-quarter lag when the market is transitioning toward a bottom. Based on our visibility today, we are currently expecting a low single digit decline in sequential revenues with margins also drifting modestly lower."

As the No. 1 pressure pumper in North America, a bigger market share has been an advantage during this downturn, President Jeff Miller told analysts.

"North American revenue was down 25%, but Halliburton's stage count was down less than 10% and average proppant per well increased 7% sequentially," he said. In addition, close to 85% of the "active" fleet continues to work on 24-hour operations.

"So now that the rig count appears to be scraping along the bottom, what happens next?," Miller asked rhetorically. "The exact timing is still difficult to predict, but the previous cycles would point us to the...progression of how the story should play out as we move forward.

"First, activity stabilizing [will mean] the healing process can begin with respect to pricing and margins. This will then allow our input cost savings to catch up and our efficiency programs and well solutions can begin driving margins up."

Until capacity begins to tighten, "pricing improvement will be challenged," Miller said. "Therefore, any margin improvement will likely be the result of lowering our cost base. We stacked a nominal amount of equipment in the quarter and expect to put this equipment back to work when the economics justify doing so."

Halliburton is estimating that 40-50% of total industry capacity now is idled. Miller did not detail how much of Halliburton's capacity is idled, but he said was less than 40%.

"What's unique about this cycle is how service intensity has evolved since 2013," he told analysts. "Over the last two years, the average job size has essentially doubled. And at the same time, both average pump rates and pressures are also up.

"On the plus side, bigger jobs mean more revenue and better equipment utilization for us. The downside is, we believe, larger completions are taking their toll on pumping equipment. In fact, these factors point to higher equipment attrition rates for the industry. This is precisely why we continue to invest in our service efficiency strategy..."

During the downturn, Halliburton has been retooling, working on technology and maintaining equipment. It has converted about 40% of its pressure pumping fleet to its more efficient fracturing system, Frac of the Future. By the end of the year, it anticipates that half of the fleet will have been converted, saving costs overall.

"The result is that in spite of increasing service intensity, our maintenance cost on a per unit basis is trending down," Miller said.

The market "has been myopically focused on service pricing...We know that ultimately, it will be lower cost per boe that will carry the day. To this end...we continue to deliver technology to help our customers reduce the structural costs of their wells."

Lesar said the Baker merger continues to be on track to close by the end of the year. To complete the deal, the companies have had to market some of their OFS offerings, a process that is drawing a lot of interest, he said. Any sales completion would coincide with closing the merger.

"We are enthusiastic about and fully committed to closing this compelling transaction, and are confident we can achieve cost synergies of nearly $2 billion, regardless of market conditions or any cost reduction actions taken by either company to date," the CEO said. "Our strategy remains consistent; we will manage costs through the downturn, while looking beyond the cycle to ensure that we will be positioned for growth when the industry recovers."

Halliburton reported a 2Q2015 profit of $54 million (6 cents/share), versus 1Q2015 profits of $774 million (92 cents). In the year-ago period, Halliburton lost $643 million (minus 76 cents/share). Total operating losses totaled $294 million in 2Q2015 from year-ago profits of $2.16 billion.

Excluding one-time charges, including severance costs and those related to the Baker merger, earnings from continuing operations fell sequentially to $643 million (44 cents/share) from $699 million (49 cents). Revenues slumped 26% sequentially to $5.92 billion from $7.05 billion, and from $8.05 billion a year ago.

In North America, revenues fell sequentially to $2.67 billion from $4.34 billion and from a year-ago when revenues were $3.54 billion. Completion and production revenues declined to $2.06 billion from $3.33 billion in 1Q2015 and from year-ago revenues of $2.78 billion. Revenues from drilling and evaluation services in North America fell to $609 million from $1.02 billion in 1Q2015 and from $765 million in the year-ago period.

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