Halliburton Co. and Baker Hughes Inc. are beginning to see an upturn in U.S. and Canadian oilfield services following a tumultuous three-year period, which witnessed a six-month moratorium in the deepwater Gulf of Mexico (GOM) and a frenzied shift in onshore drilling activity from natural gas fields to liquids targets.
Things finally are reaching an equilibrium after hitting the low point in 2012, Halliburton CFO Mark McCollum said last week at the UBS Global Oil & Gas Conference in Austin, TX. Halliburton now expects to add 100-150 rigs in North America through the rest of this year, he said. Business was off in part because of an oversupply of onshore pressure pumping equipment, but the operator had declared a bottom at the end of 2012 for its North American margins (see NGI, April 29).
“For us, we felt confident that we could do that because we had a fairly significant hole in our margins relative to commodity costs for guar gum that we’ve been working out of our inventory this year,” McCollum told analysts. Guar gum, which is used in hydraulic fracturing stimulation chemicals, mostly is manufactured in India, and Halliburton made a costly purchase before the bottom fell out of the market two years ago.
Now that the guar inventory has been reduced, “we have about 450 basis points of opportunity to add to our margins in 2013 as a result…We got about 300 basis points of that margin uplift in 1Q2013, so there’s still another 100 basis points, 150 basis points, that we think we can get as we move forward through the rest of the year.”
Even though the “overall” rig count in the United States was “fairly anemic” in the United States from January through March, “when you looked inside the numbers, the increase in horizontal rigs, as well as the increase in the rig allocation to our particular customer set, indicated that there was some opportunity there. And so we got some uplift in our margins…We expect that that will continue over the rest of the year.”
There are still some oilfield services pricing pressures in the U.S. onshore and offshore markets. “We had some pricing degradation, particularly in pressure pumping in 1Q2013; there will be some in 2Q2013 as well. We think as we go through the rest of the year that it will begin to abate, but it’s going to be a factor of what happens with excess capacity in the market and how quickly can that excess capacity be absorbed.”
Well efficiency, however, “is gaining dramatically,” McCollum noted. “We saw about a 15% increase in well efficiency just last year. When we look at this year, we’re continuing to see it…
“For us, combined with a modest increase in the rig count and the fact that our competitors as well as us are not adding net capacity to the market, we believe by the time that we exit 2013 we will be maybe not quite at imbalance but very, very close to an imbalance and at least close enough so that the pricing pressure itself in the marketplace has essentially abated, particularly relative to the largest competitors in the space.”
Baker Hughes CFO Peter Ragauss, who also addressed the audience last week, said North America’s onshore market “is shaping up as we expected. Canadian breakup has occurred on time, and the rig count is nearly identical to this time last year. And as normal, our Canadian business is reduced by more than half during this time of year until activity begins to resume in the third quarter.
“In the U.S., our business is trending favorably. The rig count is beginning to creep up again after remaining dormant in the first quarter as we predicted, and our U.S. business should see increased activity in line with the rig count…Our pressure pumping business continues to pull away from the low point, which, for Baker Hughes, was the fourth quarter of last year.” Baker actually raised its U.S. rig forecast in April (see NGI, April 22). “We’ve been overhauling this product line for about a year now, and the results are paying off, and we expect to see additional improvement over the course of the year.”
One of the Houston operator’s key objectives has been to increase fleet utilization by increasing the proportion of its 24-hour work, something marketed by leaders Schlumberger Ltd. and Halliburton. “We knew this transformation would be slow, and we still have work ahead of us,” said Ragauss. However, by the end of March, the 24-hour work had risen to 40% and today it’s at 45%. “Not surprisingly, we’ve seen a meaningful increase in stages compared to last quarter and compared to last year. When combined with pricing, which is beginning to stabilize — not quite, but it is beginning to stabilize — revenues and profitability in our pressure pumping business continue to rise.”
In the GOM, “the regulatory delays which have been affecting our customers still remain, but continued activity growth should result in sequential improvement,” said Ragauss. “And we are already seeing a positive shift in mix as our customers begin to transition from exploration to development.”
For Halliburton, the “largest issue” in North America today is Mexico, McCollum said. In the last half of 2012, state-owned Petroleos Mexicanos (Pemex) “actually overspent…and had very strong activities particularly in the northern regions, Burgos and Chicontepec…Pemex has indicated that they’re going to be tendering a significant amount of business in the North, particularly in Chicontepec, for some incentivized contracts.”
Halliburton “went down from seven to two [rigs] in 1Q2013; some of the others did as well in advance of those incentivized contracts” that Pemex plans to call for this summer, said McCollum. “We have now gone to zero in Chicontepec and in Burgos…Pretty dramatic.” Halliburton’s rig allocation overall in Mexico’s onshore and offshore now has dropped to six from 17.
Schlumberger and Fluor Corp. in 2003 secured the largest ever integrated oilfield services contract in Mexico for work in the Chicontepec (see NGI, March 17, 2003). McCollum said Schlumberger’s rig count now has fallen to seven from 16, while Weatherford International’s has dropped to about 14 from 22.
“I will tell you, we’re not really optimistic about this,” said McCollum. The rigs being dropped “are high-end rigs. They were very profitable, full services, particularly in Chicontepec. What’s most disappointing about it is that we were creating significant value for Mexico in Chicontepec. It was a highly successful lab and to go all of a sudden to zero rigs just is very frustrating. And then of course there’ll be some fixed costs around that because those are our rigs, and they’re contracted, so we carry some of that cost…It does change the margin outlook.”
Baker doesn’t have a “very big business” in the affected basins, said Ragauss. “We’ve done some great work there on our lab, having increased production significantly, and this is an area we believe Baker Hughes can add value to our customer. We think we have a good opportunity to grow our business in this area. But for now, we’ll have to set growth plans in Chicontepec aside. We don’t expect to resume drilling activity in this area until after a new round of tendering later this year.”
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