Strong earnings from U.S. natural gas and oil shale operations lifted Halliburton's earnings in 2Q2010, but rough seas are ahead for U.S. offshore operators, CEO Dave Lesar said Monday.

Net profits in 2Q2010 jumped sequentially to $480 million (53 cents/share) from $206 million (23 cents). All product service lines and geographic regions experienced sequential revenue growth from 1Q2010, with the strongest demand in the United States.

Total revenue jumped 17% and operating income was up 70% sequentially, "driven by increased activity in the unconventional natural gas and oil basins in North America," Lesar said during a conference call with investors.

"Revenue in North America increased 24% sequentially, outpacing the 13% growth in United States land rig count. Operating income grew over 90% sequentially as equipment utilization surpassed peak 2008 levels, further accelerating opportunities for pricing improvement.

"Increased horizontal drilling and the development of liquids-rich reservoirs amplified service intensity, as longer horizontal laterals increased the demand for premium tools, more sophisticated fluid systems and the amount of horsepower needed for completions work."

However, Lesar cautioned that the oversupplied gas market could moderate Halliburton's earnings in the second half of this year.

"Going forward, we believe North America land rig count growth may moderate as activity in the dry gas basins may slow due to weak natural gas fundamentals, which should be partially offset by the continued growth of oil- and liquids-rich reservoirs," he said.

Internationally the oilfield services giant expects to see revenue and margins grow, weighted toward the end of the year as customers look at their spending plans in light of current economic conditions and "lessons learned" from the situation in the Gulf of Mexico (GOM).

"The tragic incident that occurred in the Gulf of Mexico and the subsequent suspension of deepwater drilling, we believe, will usher in a new regulatory climate and will have a profound impact on how deepwater drilling is performed," Lesar said.

Halliburton has begun to take "appropriate actions to mitigate the impact of the reduced activity in our Gulf of Mexico business, including redeploying our people and equipment to other areas of stable or increasing activity."

The deepwater drilling suspension in the GOM "will negatively impact our earnings by 5-8 cents per quarter for the remainder of 2010," the CEO noted.

"The events in the Gulf of Mexico have not stifled our enthusiasm for increased deepwater activity in the coming years. Deepwater will continue to serve as an important source of hydrocarbons necessary to meet future energy demand."

Although Halliburton has begun to redeploy people and some equipment to other offshore basins around the world, Lesar said the company won't abandon the GOM.

"Yes, we will try to move people, we will move equipment, but we will maintain our vast Gulf of Mexico facilities, lab and manufacturing...on the basis that the Gulf is going to come back, which we believe it will.

"It will be a drag on earnings for a period of time, but in our view, when the Gulf comes up again, we will have to have that stuff [equipment] in place...and we can recalibrate it and reconstitute it at some time in the future..."

Asked what he was hearing from offshore producers about the kinds of regulations they are preparing for, Lesar said the "discussions are many, the conclusions are varied...I think that nobody believes that they will be out of business in the Gulf of Mexico a year from now.

"The big concern is the ability to get deepwater rigs to come back into the [U.S.] deepwater market" once the moratorium is lifted." The equipment by the time the moratorium is lifted could be "absorbed in other parts of the world..." and the concerns about coming back into the GOM will be centered on the new insurance costs and the new regulations.

Halliburton expects that the U.S. deepwater rig count will fall almost by half to 17 rigs.

"In the next 12 months I think there will be very little discussion taking place about the ability to ramp up [in the GOM] anywhere near the level where we were at," said Lesar.

However, Halliburton expects North American onshore operations to help defray some of the GOM losses.

The company's completion and production revenue in the latest quarter was $2.4 billion, an increase of $429 million from 1Q2010. Sequential revenue growth was seen in all regions, but the most significant was from increased activity in North America.

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