Halliburton Co., the No. 1 hydraulic fracturing (fracking) services provider in North America, said Monday fourth quarter net profits spiked 50% year/year on the strength of U.S. operations. However, as the industry shifts from dry natural gas plays to liquids, CEO Dave Lesar said costs are rising.

Operating income in the final quarter of 2011 totaled $921 million ($1.00/share), which was 6.2% above the year-ago profits of $867 million (94 cents). Revenue jumped 37% to $7.06 billion.

The North American unit’s revenue in 4Q2011 jumped 56% and profits rose 77% — the strongest in company history, said Lesar, who discussed the results with his management team during a conference call.

Halliburton’s revenue and operating income is forecast to increase this year in North America, but Lesar warned that rising costs for raw materials, labor and logistics could dent the company’s prospects. Halliburton plans to “mitigate these challenges through investment in technology and our logistical infrastructure, and by seeking to recover increased costs from our customers,” he said.

The slump in natural gas prices has sent producers scurrying to oil- and liquids-rich plays. Halliburton is right behind them, said the CEO.

Costs have begun to rise as the industry moves from gas, he told analysts. Eight of Halliburton’s fracking crews are moving to liquids-rich basins this quarter, Lesar said. Addressing a concern that has weighed on oilfield services companies, the CEO said the idea that North American profit margins might collapse this year was “ridiculous.”

Halliburton had expected revenue to grow faster than producers would drill.

“We are very optimistic about 2012 and fully expect that North America revenue and operating income will increase in 2011, although we could see margins normalize somewhat through 2012,” said Lesar.

His comments followed news that Chesapeake Energy Corp., the No. 2 domestic gas producer, announced that it would reduce dry gas drilling and drastically cut its spending this year (see related story).

Halliburton, which is the U.S. leader in pressure pumping services used to frack wells, has been challenged logistically and supply-wise as producers move to oily plays. The crews that are moving to the oily plays have a learning curve before they can achieve efficiencies as in the dry gas plays. Getting crews up to speed has required Halliburton to rely on “commuter crews” to facilitate training.

Slowdowns in several parts of the United States also were evident in the final quarter because of delays in its supply chain, such as receiving enough proppant to frack wells. More proppant is used to drill oil wells than gas wells, said Lesar. The slowdowns in the final period of 2011 were evident in the Rockies, the Bakken Shale, South Texas and the Permian Basin.

“In North America, the trend toward increased horizontal oil-directed activity continued in the fourth quarter with the United States oil-directed rig count up 8% sequentially compared to a natural gas rig count decline of 2%,” said the CEO. “We expect this trend will persist into 2012, along with continued improvements in drilling and completion efficiency.”

The customer mix in North America also is shifting to more international oil companies, national oil companies and large independents, said Lesar. This shift in customers is companies that “have more stable spending patterns,” and away from “customers that are more financially challenged.”

Halliburton also has seen a “trend toward higher average footage drilled per well to 7,000 feet from 5,000 five years ago,” he said. “Today reserve development demands four times as much horsepower as in 2004. Clearly there has been a dramatic shift in the last several years, which bodes well for high demand in North American unconventional markets.”

Improvements in 4Q2011 also were seen by Halliburton in the Gulf of Mexico (GOM) operations, which began to ramp up last year following a moratorium on deepwater drilling. The activity level for Halliburton’s customers is returning to “more normal levels of activity,” said Lesar.

“Our fourth quarter revenue is now above pre-moratorium levels. We expect continued activity increased in 2012,” he said.

Last Friday Schlumberger Ltd. CEO Paal Kibsgaard said he expected the drilling rig count in the GOM to return to pre-Macondo levels later this year (see Daily GPI, Jan. 23).

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