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Producers Clamoring for Hydrofrack Services, Says Halliburton CEO

Demand for oilfield services in North America's onshore -- especially hydraulic fracturing (hydrofracking) -- is growing faster than companies can add equipment, Halliburton CEO Dave Lesar said Monday.

"Overall, growth in the demand for our service has outpaced capacity additions and we expect this imbalance to continue going forward," Lesar said during a conference call. "Any of the liquids plays -- be it the Bakken, the Eagle Ford, the Marcellus -- they are all continuing to be undersupplied in some cases, undersupplied dramatically from a fracturing market."

One of Halliburton's drawing cards is its advanced technology, including its proprietary CleanSuite Services, three technology systems that are designed to reduce the environmental footprint of hydrofracking operations. An El Paso Corp.-operated well in North Louisiana was the first gas producing well to be completed using all three of the CleanSuite technologies for both hydrofracking and water treatment.

At the El Paso well more than four million gallons of "CleanStim" hydrofracking fluid, comprised of ingredients sourced from the food industry, were used to enhance the well, which resulted in faster production of natural gas. Nearly 4.8 million gallons of water also were treated through the company's "CleanStream" process, which uses ultraviolet light instead of additives to control bacteria in water. Another one million gallons of produced water were recycled for use in the well through its CleanWave system, which reduced the need for fresh water, it said.

Tim Probert, who is president of global business lines and corporate development, said operators are "looking for technology to optimize their fracture investments." Developing "a more surgical approach" for hydrofracking is helping to reduce water use by onshore operators and "they are proving their value in a range of operating environments."

Although some oilfield services companies reportedly are pulling back from dry gas shale plays, Halliburton will remain an active player, said the CEO.

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," he said.

The company remains "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."

He said the company has found "a business model that would allow to us stay there with our customers and make the kind of returns that they want and the kind of returns we want, but I think that if you think about the dry gas basins, I would say they're probably at equilibrium..."

The strength of its North American onshore operations lifted Halliburton in the second quarter, with profits up by 54% from a year ago. 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.

Halliburton's operating margin in the second quarter was "the highest it has been since 2008," Lesar 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," Lesar explained.

Energy analysts were impressed by the earnings in North America. FBR Capital Markets analyst Robert MacKenzie and his team said "this very strong report underscores the continued tightening of the North American market and, in light of positive management commentary, reaffirms our belief that the North American tightening is sustainable at least through year-end."

In addition, the FBR team said Halliburton's "technological leadership is compounding. The company is expanding its role of technological leadership by bringing to market new, value-adding offerings both domestically and abroad. Notably, the company has recently introduced 'RapidFrac,' a sliding sleeve completion system that is being met with excellent reviews. In the field, RapidFrac has been able to generate up to 75% increases in production along with a 50% reduction in pumping time, relative to conventional systems. Management believes this offering will begin to see increased adoption both in the Bakken and elsewhere in the near term."

MacKenzie and his colleagues said they are convinced "not only that the liquids-rich plays will continue to drive fracturing demand growth in excess of supply growth but also that increasing technical complexity will favor the more differentiated companies like Halliburton at the expense of more commoditized providers of fracturing services."

Canaccord Genuity analysts Scott Burk and Lawrence Lee also were pumped by the earnings report. Halliburton, they said, focused on "setting prices that more effectively reflect the value they provide to customers (evidently a lot in U.S. land!). Along with fracture services and some drilling services being used to pull through pricing on other product lines suggests that Halliburton may be able to improve on prior peak margins, or sustain them for a longer period than the '02-'08 cycle."

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