Shale Daily / NGI All News Access

Halliburton Sees Challenges in Move from Gas to Liquids Plays

A combination of fit-for-purpose technology with solid execution in drilling horizontal wells using hydraulic fracturing (fracking) is giving Halliburton Co. confidence that it can deliver on its "frack-of-the-future" strategic initiatives, a company executive said Monday.

Halliburton's Tim Probert, president of global business lines and corporate development, shared a microphone with the management team during the company's 4Q2011 conference call. Probert highlighted Halliburton's progress in introducing technology to improve efficiencies and reduce costs in unconventional resource plays across North America, where it's the largest fracking services provider.

Technology and efficient operations are the lifeblood of oilfield service companies, especially in the age of horizontal drilling and fracking. Companies attempt to gain customers through new stimulation techniques and pressure pumping, and in just the past few months Halliburton has launched a suite of onshore drilling tools. The focus to create new, more efficient technology comes at a busy time for the Houston-based oilfield services provider, which is following North American producers from the dry gas fields to oil and liquid formations.

"The shift from natural gas to liquids-rich plays continues and was quite apparent in the fourth quarter," said CEO Dave Lesar. "The U.S. rig count grew 3% sequentially, with oil-directed rigs up 8% and natural gas rigs down 2%. The shift toward oil and liquids-rich plays are a direct result of the stability of higher oil prices and higher operator returns for these resources.

"Completing these wells requires higher levels of service intensity due to advanced fluid and completion technologies and creates an additional opportunity for us to otherwise differentiate ourselves from the competition."

For some time Halliburton has seen the impact oil-directed horizontal activity is having on the North American market, the CEO noted.

"For instance, in addition to natural gas rigs targeting liquids-rich plays, the oil rig count now represents more than 60% of the total in North America, a level we have not seen in decades. Our customers' sources of revenue has also shifted dramatically toward oil, with the sale of U.S. oil and liquids representing approximately 70% of total upstream revenue today. This compares with an approximate 50-50 split just five years ago."

Halliburton's customer mix continues to shift toward international oil companies, national oil companies and large independents "and away from those customers who might be more financially challenged in the current market," said Lesar.

"We are also seeing a trend toward higher average footage drilled per well, up to approximately 7,000 feet from 5,000 feet just five years ago...Reserve development demands four times as much horsepower per rig as compared to 2004. So clearly there's been a dramatic shift over the past several years, and all of this bodes well for a continuation of high demand in the North America unconventional markets."

The last time the breakeven price for oil development was "so far below prevailing oil prices" was in the early 1980s "when the rig count was more than double what it is today. And despite the vast amount of work we've done in North America in recent years, there's only been a modest increase in net oil production, as new supplies are barely offsetting declines for mature North America basins.

"As a result, we expect continued liquids-driven activity growth in the coming years, as our customers invest in their resources and optimize their development technologies, and we plan to continue to expand our capability and drive efficiency through technology and logistical improvements to enable this growth."

In the final three months of 2011 Halliburton's North American revenue grew sequentially by 6% versus a 3% rig count on "strong activity" in the Eagle Ford and Marcellus shales, Permian Basin, Gulf of Mexico and Canada." However, cost inflation continues to have a negative impact.

"There is a delay between vendor price increases and when we are able to pass through these increases to our customers," Lesar said. "In the natural gas basins, this is becoming more difficult, and we plan to go back to our vendors for price relief in some areas. This will take some time. "

Logistics and proppant supply also are pressuring the marketplace. "While we have a very sophisticated logistics group, there are times when issues arrive that are not within our control," said Lesar. "We experienced logistical and proppant supply disruptions in several areas in the fourth quarter, and this impacted the Bakken, Rockies, South Texas and the Permian, all of which had a negative impact on margins."

Halliburton also experienced "inefficiencies associated with frack fleet relocations to address the challenges the industry is facing in 2012..."

The company's management team remains committed to having a balanced portfolio North America's dry gas basins and liquids plays because many of its customers operate in both, Lesar said.

"Our strategy was to support these customers in the natural gas basins with a hyper-efficiency business model that went beyond just 24-hour operations. We stayed with these customers in the natural gas basins even as other competitors left to chase work in the oil plays. This strategy has worked well and deepened our relationship with these customers. Our understanding with them was that in return for staying with them in the natural gas basins, we would get their work in the liquids-rich plays as equipment became available.

"This strategy is now playing out to our advantage. As natural gas prices are falling to the sub-$2.50 level, we are proactively working with these customers to now serve them in the oil plays as they shift their capital spend to liquids and away from natural gas."

It's a benefit for Halliburton to work with its customers for the long term, Lesar said. "We believe that these pressures that come from this on revenues and margins will be limited...The additional benefit we get from these moves is that even more of our revenue will be generated in the liquids plays, while we still have the ability to increase prices, which will help to offset inflation pressure. Furthermore, the shift to the oil basins requires more expensive materials, particularly gels and proppants, which are already in tight supply.

"Additionally, we believe that the movement of service capacity out of the natural gas basins will eventually help remove the overhang in natural gas supply. So with great success, we dealt with a number of these significant logistical challenges in 2011, and we see them being able to accommodate the tremendous growth that we see as we move into 2011, even though it's created some near-term uncertainty and pressure on margins."

The concern about what may happen in North America's dry gas basins "is a real one," said Lesar. "However, there are customers who will continue to drill in these basins, as they have a low-cost gas basis, a hedge bought before the collapse of pricing or contracts to send their natural gas to markets where the pricing is better. These are our customers, and they will continue to need our services in the natural gas areas. And in most cases, we have a long-term contract with them that value the efficiencies we bring, so they can continue to make money even at lower prices.

"We have not yet exhausted the demand for fleets that we can relocate to those customers who want our services in the liquids basins, and we will continue to do that as necessary. We have established a great position in the U.S. market. And in these uncertain times, I believe that will pay off big for us."

ISSN © 2577-9877 | ISSN © 2158-8023
Comments powered by Disqus