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Oilfield Service Operators Eye Recovery Later This Year

The last three months of 2009 proved to be treacherous for U.S.-based oilfield service operators, with Baker Hughes Inc.'s (BHI) profits falling 81%, Halliburton's off 48% and Schlumberger Ltd.'s down 31%, but a recovery in pricing and services is likely to pick up later this year, executives said.

"In some areas of the U.S. we are again starting to hire and as a result of strengthening demand for our products and services, and as this demand expands and leads to improved capacity utilization, we will be able to implement price increases," BHI CEO Chad Deaton told financial analysts last week. BHI activity outside North America also is expected to improve this year, he said, but prices will be softer because of contracts negotiated at lower 2009 prices.

The "price deterioration" that hit the oilfield services sector in North America last year has ended, giving BHI and other operators a "better chance for pricing as time goes on," said Deaton. "If the rig count continues to climb to 20, 30 rigs a week, possibly in the second quarter we could raise some prices." Contract prices have flattened after plummeting in 2009. Let's put it this way," he said of North American projects, "we're not seeing the price deterioration anymore."

BHI's net income for 4Q2009 was $84 million (27 cents/share), well below the $432 million ($1.41) reported in 4Q2008. The merger with shale expert BJ Services Co., announced last year (see NGI, Sept. 7, 2009), is on track for completion by the end of March, the company said.

Halliburton CEO Dave Lesar told analysts in a separate conference call that his company would "know a lot more about where the U.S. market is going to go at the end of the first quarter, with wherever [gas] storage is at that point in time and the emotion of where the U.S. economy may be heading."

Halliburton reported net income of $243 million (27 cents/share) in 4Q2009, down by almost half from $468 million (52 cents) reported in the year-ago period. Revenue fell 25% to $3.69 billion.

An estimated 1,300-1,500 U.S. gas wells were awaiting completion going into 4Q2009, said Tim Probert, president of Halliburton's Global Business Lines and Corporate Development. Around 450 gas wells were completed in the last three months, but that leaves a lot of wells still unfinished. As the rig count dropped last year, Halliburton's management team also expected gas production to fall.

"We've certainly been surprised at how well production has held up," Probert told financial analysts during a conference call. "We predicted a different outcome. We will be working this backlog off during the course of [4Q2009] and [1Q2010], which is a net positive at the end of the day, but the tightening of supply is, after all, a one-time event. Once it's gone, it's largely gone..." It's "anyone's guess at the moment" as to where U.S. gas drilling would go in 2010.

Before making any forecasts on the U.S. gas market for 2010, Probert said he would need to see more data. "We hope to see some incremental demand for the health of the natural gas business, and we need to see it as we exit Q1. The whole matter is a little bit of an unknown at the moment."

Several producers have announced "potential increases in upstream spending for 2010 targeted for new frontier developments and ultra-deepwater where we are well positioned," Lesar noted. "However, we expect operator investment will remain weighted toward the second half of the year." This is "a transition year as the industry seeks to balance supply growth with recovering hydrocarbon demand."

The gas shale plays are consuming equipment "very dramatically," Lesar said. "We have to take more horsepower to every job, and we're grinding horsepower up in every job. The smaller players were getting their equipment used up going into the shale plays, and they are actually going away from the shale plays because it is using equipment up. If we can get the supply/demand balance for equipment in a better situation, it will give us a little more pricing power..."

Halliburton is "almost exclusively" using a drilling unit made specifically to operate in "heavy shale environments," Lesar said. "That's the focus on our capital spend for 2010. It's also fair to say, with the retirements [in equipment] we've had, we are using up equipment...I also think the supply of pressure pumping equipment as an industry is going down a lot faster than people think. It's a heavy toll that we're seeing on equipment today, especially in shales."

"For natural gas activity we remain a great deal more cautious," Schlumberger CEO Andrew Gould said in his company's conference call last month (see NGI, Jan. 25). "We consider that worldwide markets remain generally oversupplied."

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