A solid performance in North America’s onshore during the first three months of 2011 lifted Halliburton Co.’s profits from a year ago, helping to overcome the losses in the Gulf of Mexico (GOM) and geopolitical turmoil overseas, CEO Dave Lesar said last week.

“Never has a quarter had so many moving parts,” Lesar told analysts during a conference call to discuss first quarter earnings. However, the upheaval “has not dampened our enthusiasm for the long-term prospects…The industry is on the verge of the next major upcycle.”

What helped Halliburton succeed in the first three months of this year was its U.S. land business. The Houston-based oilfield services giant is the biggest U.S. provider (see related story).

“There’s no mistaking our view…the headline is that there’s clearly room for operating income and revenue to grow as we get further into 2011,” said the CEO. “As you know, we were very bullish on the U.S. market when some of our competitors were not. We remain extremely bullish on this market and are happy with our position today.”

Demand for oilfield services from North America’s unconventional resource drillers continues unabated and Halliburton could complete contracts “in any terms we wanted to dictate at this point in time,” he said. The Halliburton chief said he feels “more confident of the resiliency” in North American activity through the end of the year than he did in January.

Halliburton’s North American onshore rig business was up 2% in the first three months of 2011 from the final period of 2010. The business was stronger despite “abnormally harsh weather in the Midcontinent, the Rockies and particularly the Bakken [shale], where we have a disproportionate amount of work,” Lesar said.

However, natural gas-directed drilling in North America was down about 10% from last summer and “is expected to remain under pressure because gas produced from oil and liquids-rich drilling will inhibit a correction of the oversupply situation…Any curtailment is more than offset by an increase in liquids-directed activity…

The “shift to oils is unabated,” said Lesar. Halliburton’s oil rig count in the first three months of 2011 jumped 11% from the year-ago period, while the gas rig rate declined by 5%. There’s plenty of onshore drilling and completion work to come.

According to Halliburton estimates, there were 3,500 uncompleted wells in the U.S. onshore at the end of March. The company expects to “work off some of that backlog in the second quarter” but it will depend on what customers want and need, said the CEO.

“We could contract out most of the capacity in any terms we wanted to dictate at this point in time,” he told analysts. For now “we’re keeping the contracts relatively short and not doing any fixed-price contracts.”

With all of the work on its plate Halliburton has begun to transition from fixed-price contracts to performance-based contracts.

“We’re very much driving toward incentive-based contracts,” said Tim Probert, president of Strategy and Corporate Development. “We’ve invested quite a bit in the last couple of years in developing efficient work flows…stitching together all of the elements. It’s a key value proposition…and making it much easier to sell for us by engaging in incentive contracting…

“Today we’re very much focused on time-based efficiencies, primarily in the well-construction phase. Over time, we’ll have the potential to evolve to production-based efficiencies too.”

“Horizontal oil represents the fastest growing segment of the market today, up 170% over the prior year,” said Lesar. “The structural change to oil and liquids-rich reservoirs has favorable implications to the overall business…Longer laterals, more complex fluids, increased volumes are driving the service industry compared to dry gas areas…”

Pressure pumping and utilization levels in the first three months of this year “passed those of 2008,” said Probert. “We’re seeing it across the board, whether it’s pressure pumping, completions…It’s an across-the-board phenomenon.”

The onshore services industry is “evolving in a significant way as we complete more oil wells versus dry gas. There’s an increased degree of complexity, and the underlying [oil] commodity price allows you to drill longer laterals, more complex stages…it’s driving the service intensity relative to dry gas.”

Geopolitical turmoil “is forcing customers to look to more stable markets, like the United States, and we could see an acceleration of spending,” said Lesar. “We have a bias in increased activity on U.S. land through 2011 and confidence in North American margins through the rest of the year.”

Inflation has begun to creep into costs for labor, chemicals and equipment, which is slowly moving up pricing, CFO Mark McCollum told analysts (see related story).

“Our general view is that capacity is being fully absorbed by the increase in service intensity, horsepower per job, the increase in the number of 24-hour operations,” McCollum said.

“The environment is still ripe to continue to move pricing. We are continuing to do that and more than covering cost inflation…[which is] also pushing against us. We still believe we can move margins forward in North America.”

Probert said “all elements of North American inflation are kicking in…labor, transportation, you name it.”

The “unabated shift to unconventional oil and liquids-rich basins more than offset geopolitical issues in North Africa and the ongoing effects of the suspension of deepwater activity in the Gulf of Mexico,” Lesar said.

The “service intensity” has increased because more producers are asking for “tailored solutions that require more complex fluid chemistry, longer laterals, higher proppant volumes and strategic placement of [hydraulic fracture] frack stages,” said Lesar. “Going forward, we believe this structural shift will continue through 2011, further increasing demand for our services.”

The Interior Department in the first quarter began to issue drilling permits for the GOM’s deepwater for the first time since the Macondo well blowout last year; to date 10 offshore permits have been awarded.

Halliburton, which provided oilfield services to BP plc for the doomed well, is expecting to face mounting legal actions over the Deepwater Horizon tragedy, CFO Mark McCollum said during the call (see related story). However, Halliburton already has won 30% of the newly approved GOM drilling services contracts and 40% of the well completion work.

“This is actually higher than our historical market share,” Lesar said of the new GOM contracts. “Our customers continue to communicate their commitment to the Gulf and discuss potential projects using our existing contract base.”

In the coming months Halliburton plans to bring back some equipment and workers to the GOM that it had deployed to the U.S. onshore during the drilling moratorium.

“We believe we have hit bottom on the Gulf of Mexico, with the increased permits,” said McCollum. “In time, we still expect as the year progresses to see the Gulf of Mexico get back to work. It comes at a nice time and adds to the mix favorably.”

Halliburton’s customers “are committed to the Gulf and are discussing projects,” said Lesar. “Our strategy at keeping our infrastructure and most of the headcount impacted the short-term results, but we now can respond to customers quickly and we will start seeing the benefits of our strategy.”

Halliburton reported net income of $511 million (56 cents/share) in 1Q2011, which was more than double year-ago earnings of $206 million (23 cents). Consolidated revenue jumped to $5.3 billion from $3.8 billion, while consolidated operating income totaled $814 million compared with $449 million in the year-ago period.

Operating income in North America jumped to $732 million in the latest period from $230 million a year ago, even with winter weather-related work stoppages. Onshore services profits in North America were up 170% over a year ago and should continue to increase through 2011, Lesar said.

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