Even with the uptick in U.S. natural gas prices, the outlook for North American gas activity this year “has not materially changed,” according to Halliburton Co. CEO Dave Lesar.
The U.S. “horizontal rig count was up sequentially. We expect that to continue, especially in the Permian Basin,” where operators are searching for oil, he said during a conference call to discuss quarterly earnings.
However, “we need to see sustained pricing improvements before [gas] activity increases. Except for the Marcellus Shale, our view is that natural gas drilling will not be a major activity driver in 2013 in the United States. The availability of associated gas and shut-in gas that will come to market will likely delay a meaningful uptick…If there is an uptick, it would be late this year. We are, however, increasingly optimistic about gas activity in 2014.”
The company “called 4Q2012 the bottom for North American natural gas margins, and the first quarter bears that out,” said Lesar. “Even with the Canadian spring break-up, we see margins expanding through 2014.”
The $4.00/Mcf prices “are where producers start locking their hedges in,” and many producers “are quite profitable from a returns standpoint” at that price. “What we want to convey is that we’re not counting on [gas drilling] for the rest of the year. If gas prices stay above the $4.00 level, that only adds to the potential optimism for 2013 and ’14.”
Lesar had said in January that gas prices and excess hydraulic fracturing overcapacity would pressure its North America margins this year (see Daily GPI, Jan. 28). However, North American margins surpassed expectations, as the company worked through an oversupply of guar gum used in stimulation. In addition, “customers refreshed their budgets.”
North America comprises about 58% of Halliburton’s revenue stream, and the region’s revenue fell 1% sequentially from 4Q2012. However, operating income jumped 30% even as the U.S. rig count dropped 3%.
“Margins improved approximately 400 basis points, as we began to benefit from lower cost guar, increased customer activity, internal cost efficiencies and higher service intensity,” said the CEO. “For these reasons, we expect margins to continue to expand over the course of the year, and we believe we may see modest pricing increases as customers adopt new technology to improve well production.”
There was 10-15% too much U.S. hydraulic fracturing capacity in the first quarter, but “it could get absorbed very, very quickly in 2014 based on what we’re seeing,” said COO Jeff Miller.
The restrengthening North American business isn’t a “matter of geography,” said Lesar. “It’s a matter of customer base. As we’ve said for years, we only deal with what we call ‘fairway players’ in the U.S.-North American market. These are the folks that keep rigs up, that keep their budgets up through thick and thin. But they also are those dealing with the lowest lease costs…The customers we are working for are increasing their rig counts and increasing their budgets…Notwithstanding what others say about not feeling so confident, we feel strongly about the customers we have.”
Halliburton is in “advanced” settlement talks with some private parties regarding the April 2010 Macondo well blowout in the deepwater Gulf of Mexico. Halliburton was the oilfield services contractor and it had poured cement for the BP-operated well. The company in 1Q2013 added $1 billion ($637 million after taxes) to reserves tied to litigation involving the explosion. Last year it had set aside $300 million for spill litigation.
“We are pursuing these settlement discussions because we believe that an early and reasonably valued resolution is in the best interests of our shareholders,” Lesar said. The amount set aside “is based on where we are in the negotiations at the present time.” The company’s most recent offer to settle civil claims includes stock and cash, which would be paid over a period of time. The reserve estimate doesn’t include what Halliburton may recover through insurance.
The increase to reserves comes a week after the first phase was completed of a trial in New Orleans to determine the degree of liability for BP, Halliburton and Transocean Ltd., which operated the Deepwater Horizon platform. BP has argued that a series of miscalculations and mistakes by several parties led to the tragedy, but Halliburton lawyers had argued that BP had final say on all project decisions.
Testimony in the latest proceedings didn’t appear to help Halliburton as officials revealed they knew the cement mix wasn’t the top choice, and some executives discarded post-accident test results. Halliburton also was admonished by the overseeing judge for introducing evidence that should have been turned over more than a year ago.
“If the settlement discussions are not successful, we’re fully prepared to see this matter to conclusion in the courts,” said CFO Mark McCollum. A settlement would require the other parties to “be reasonable on their part too.”
Including the reserve set aside to cover claims related to Macondo well blowout, Halliburton reported a net loss in 1Q2013 of $18 million (minus 2 cents/share) compared with profits of $627 million (68 cents) a year earlier. Revenue rose 1.5% to $6.97 billion, a record for the first quarter, with international cash offsetting an 11% drop in North American revenue. Completion and production revenue was down 4% year/year; operating income also fell. North America C&P operating income was down $439 million. Drilling and evaluation revenue totaled $2.9 billion, up 11%, and operating income also rose 11%. North America D&E operating income fell 9%.
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