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North American Unconventionals Drive Halliburton Profits

The sustained push to unlock shale gas and oil across North America drove Halliburton Inc.'s profits in the third quarter, CEO Dave Lesar said Monday.

Speaking with financial analysts during a conference call, Lesar said profits from shale oil and natural gas liquids plays will be more than enough to offset lower returns in unconventional dry gas basins through 2011.

Halliburton has moderated its pricing for some of its "key" gas customers and is committed to not move equipment to "chase higher pricing" in more oily and liquids-rich plays, the CEO said.

"A large number of our customers have got basically a foot in both camps, the dry gas camp and the liquids-rich camp," Lesar explained. "But there are some customers that by the nature of their assets are much more focused on those dry gas plays...We have always tried to develop new business models to reflect sort of the realities of where natural gas pricing is in the U.S.

"We do believe that natural gas is going to play a large part in the U.S. energy future and therefore, our business future, and it's up to us to find, working together, a business model for the dry gas plays that will allow our customers to keep their rigs up...in a sustained low natural gas price environment.

"It's also [a model] that allows them to make money and it allows us to make money and the kind of returns we want, so it's a bit of an experiment."

Enabling dry gas producers to operate with lower service costs has "suboptimized the profitability that we could have had," Lesar admitted. "It would have been easy to move [drilling] equipment into an oil shale or a liquids-rich shale, but these are good customers of ours. They are key customers of ours, and we believe that it's worth an investment in finding a business model that works for both sides."

Halliburton's substantial footprint in global oil and gas services "gives us a unique ability to experiment with new business models, customized to meet a wide range of customer-economic thresholds," Lesar said.

North American oil and liquids-rich basins now support about 60% of the U.S. rig count, Lesar told analysts. Those oily basins allow Halliburton to offset reductions in the gas shales.

However, in some of North America's shale basins there is an "acute" shortage of pressure pumping equipment.

"Completions intensity has grown dramatically over the last year," said Lesar. "We have seen our horsepower requirements per job increase by over 50% in the last two years while the number of hours that the equipment has utilized power well has also doubled.

"Additionally we are seeing that the successful horizontal drilling and stimulation techniques that we are using to exploit unconventional gas activities are now being transferred and applied to both conventional and unconventional oil plays."

An estimated 2,500-3,000 of uncompleted wells will be backlogged in North America at the end of the year, "driven by the requirements to drill wells to hold leases," he said. This also can provide some stability to ongoing completions work for some time, even in the lower rig environment.

"Further, we believe this backlog could continue to build if the rig count does not moderate and if income and pressure pumping capacity is added over the next nine to 12 months."

Halliburton has transferred about 400 employees from its Gulf of Mexico operations to other regions in the United States and to global operations. It also has added more than 6,600 new employees to its North American onshore operations since the beginning of the year.

Interest in unconventional gas and oil development overseas also is "growing significantly," said Lesar. "In contrast to North America, international unconventional resources are highly undercapitalized from an equipment standpoint, despite having estimated reserves three times the size of North America."

The service company's net income for 3Q2010 was $544 million (60 cents/share), and consolidated revenue totaled $4.7 billion. Consolidated operating income was $818 million in the latest quarter, up sequentially from $762 million in 2Q2010. Excluding the impact of one-time charges in 3Q2010, operating income was $868 million, which is 14% higher than in the year-ago period.

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