Halliburton Co., the No. 2 global oilfield services provider, is beginning to see some blue skies in North America this year and going into 2014, CEO Dave Lesar said Monday.

“Our results in the first quarter played out pretty much as we said they would in our last call,” Lesar said during a conference call to discuss 1Q2013 earnings performance. He had said in January that overcapacity in North America’s land pressure pumping services, as well as low natural gas pricing, would be a big impact this year (see Shale Daily, 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 [bps], 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.”

The U.S. “horizontal rig count was up sequentially. We expect that to continue, especially in the Permian Basin.”

However, “even with the uptick in natural gas prices, the outlook for activity this year has not materially changed,” said Lesar. “We need to see sustained pricing improvements before 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,” he said.

“We called 4Q2012 the bottom for North American natural gas margins, and the first quarter bears that out. 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,” said the CEO. “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.”

Halliburton’s operations, said COO Jeff Miller, continue to see “service intensity and cost savings” and 85% of the U.S. drilling crews now are signed to long-term contracts, with a significant number working 24-hour shifts in the onshore. Nearly all of the U.S. contracts had been renewed by the end of March. There still may be some impact on renegotiated contracts, but “we believe the worst of the pricing pressure is behind us…”

Asked what had changed to give Halliburton confidence that North American activity would increase this year, Miller pointed to “conversations with clients, that are geared more toward making better wells. The chemistry, the chemistry applications, those are the applications of our technology. That’s the leading edge right now of discussions we are having…The horizontal rig count is up, and inside of that, it went up for customers we work for…Across the quarter, the well count and the stage count was up, and that drives performance when we are aligned with the right customers.”

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…”

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…

“We pride ourselves on picking and choosing who we work for; we wouldn’t focus on where we are working…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.”

Including reserves set aside to cover claims related to the BP plc 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 (C&P) revenue was down 4% year/year; operating income also fell. North America C&P operating income was down $439 million. Drilling and evaluation (D&E) revenue totaled $2.9 billion, up 11%, and operating income also rose 11%. North America D&E operating income fell 9%.

Halliburton’s “margin progress in North America ran well ahead of our forecasts” and “this should boost 2013 estimates,” said Jeff Tillery and Byron Pope of Tudor, Pickering, Holt & Co. Inc. “That will be a difference” for the company versus Schlumberger Ltd. and Baker Hughes Inc., whose “earnings beat but 2013 earnings estimates didn’t change” (see Shale Daily, April 22).

Both North American D&E and C&P “beat our expectations. Notably, 16.3% operating margins beat our expectations by nearly 300 bps (on revenues that were only 1% better than forecast)…80% of the North American beat was from C&P (pressure pumping driven segment), where margins were 460 bps-plus” from 4Q2012 to 15.7%. “D&E showed nice progress as well with margins 170 bps-plus on revenues 4%-plus quarter/quarter.”