Last year proved challenging for the North American oilfield sector, as operators moved rigs from natural gas to more lucrative liquids targets and an overcapacity in pressure pumping continued to impact margins. This year won’t be much better, Halliburton Co.’s management team said Friday.

Although the international business is beating expectations, the U.S. and Canadian land drilling sectors still face headwinds through at least the first half of this year, CEO Dave Lesar told analysts during a conference call.

The final three months of 2012 “marked the bottom” for U.S. margins, and the natural gas rig count should “improve from fourth quarter levels, but it will be down slightly compared to 2012,” he said. Most of the impact is seen in the first six months, as prices continue to slump.

The company remains “optimistic” that natural gas sector will come roaring back, but it won’t be this year, said the CEO. Halliburton is the largest pressure pumping supplier for hydraulic fracturing (fracking) in the United States, and an oversupply of equipment cut into profits.

“We still believe strongly in the long-term fundamentals of the gas business,” said Lesar. “We have stayed with those customers in the natural gas basins…This strategy has created a deep relationship with those customers, and it positions us when gas activity rebounds.”

The decision to remain in the domestic gas basins has had a “negative, ongoing impact on margins, but we believe it is the right decision for us in the long-run.”

Many of Halliburton’s onshore competitors “are operating at the floor,” but “excess capacity is falling…We are expecting the industry to add hardly any capacity this year. Over time, we expect to see normal horsepower due to normal attrition. It will help with more oil drilling, but without a significant uptick in natural gas, it’s difficult to see a path for fracking to reach an equivalent this year.”

Natural gas “is not to be an activity driver this year,” said Lesar. The gas rig count “has flattened, but if we see any meaningful uptick in natural gas activity, it likely will not occur until the second half of this year.”

Halliburton last year made a poor strategic decision to stock up on guar gum from India, an additive used in fracking fluids. The market fell sharply, leaving the company with a product that was more expensive at the time than it was worth (see NGI, July 30, 2012).

The higher priced guar should be gone before the end of March. But there was a “silver lining,” said Lesar. Halliburton turned to technology and reported stronger sales for its artificial fluid additive, PermStim, which replaces guar gum in some applications.

Halliburton last year also rolled out its “Frac of the Future” equipment initiative, which has helped to reduce crews and lift efficiency at well sites (see NGI, Oct. 24, 2011). The upfront roll-out costs temporarily had a negative impact on last year, said COO Jeff Miller. Also adding to costs was a decision to stack equipment in 4Q2012 because the pricing just wasn’t there, he said.

North America revenue was down 5% in 4Q2012 from 3Q2012, which was “in line” with the sequential 5% decrease in the U.S. land rig count. Domestic operating income fell 22% sequentially, “driven mainly by an unusually high post-Thanksgiving decline in activity levels with key customers, increased consumption of our high priced supply of guar, and continued pricing pressure around hydraulic fracturing contracts,” said Lesar.

“We expect to see continued pricing pressure as we renew the last tranche of stimulation contracts” for this year, he said. About 80% of Halliburton’s contracts have been renewed from last year. If contracts prove difficult to renew, he said the company may resort to month-to-month or quarterly contracts until business improves.

Halliburton’s 4Q2012 profits declined 26% year/year but still beat Wall Street expectations because of international activity growth, which offset North American weakness. Earnings totaled $669 million (72 cents/share) versus year-ago profits of $906 million (98 cents). Earnings from continuing operations fell to 63 cents from 98 cents, while revenue rose 3.2% to $7.29 billion.

In North America completion and production (C&P) revenue climbed 1% sequentially, in part because of higher activity in the Gulf of Mexico (GOM), which offset the U.S. land market. Excluding the 3Q2012 acquisition-related charges, North America C&P operating income fell $108 million, or 26%, sequentially on seasonal declines, higher costs and pricing pressures.

Tudor, Pickering, Holt & Co.’s Jeff Tillery and Byron Pope said Friday the quarterly results were impressive.

“We’d really beat up our 4Q2012 North American C&P margin assumptions, which were down nearly 600 basis points quarter/quarter, so we’re not surprised to see some outperformance on that front…2013 growth rates won’t be as robust but we should still see a ballpark of 30% year/year profit growth…and corporate earnings growth materializes as North American profitability headwind flattens out.”

The North American drilling results “were a fair bit lower…as the revenue decline was nearly in-line with the U.S. rig count,” which were expected to be offset by the GOM growth and a Canadian seasonal uptick. “All in, North America outperformed our expectations due to C&P margins contracting only 310 bps quarter/quarter instead of the 570 bps we’d modeled.”

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