Halliburton is anticipating a “structural shift” in the U.S. land market as unconventional resources become a more prominent component of the production profile, according to CEO Dave Lesar.
“We expect to benefit from this trend as operators are drilling longer horizontals and increasing their fracture and stimulation treatments to enhance initial production rates,” the CEO said during a conference call to discuss 3Q2009 earnings. “This is why it is so important for us to direct our resources to those areas. We have expanded our facilities this year to support our growth in the Marcellus, Haynesville and Williston basins. We believe these investments in our differentiated technologies will ensure that we will retain our market share gains and accelerate our growth once the market recovers.”
But it may be a while before the market recovers, Lesar warned. The Houston-based oil services giant reported a quarterly profit of $262 million, 61% lower than in 3Q2008. Revenue from North American operations increased 2% sequentially from 2Q2009, but operating income from the North American segment fell 92% when compared with the same period a year ago.
It’s not going to be “as hard a downturn as we thought a quarter or so ago,” but a significant improvement in the natural gas market is unlikely “over the next few quarters without a resurgence of a broad market economic demand in support of winter withdrawal and supply patterns,” Lesar said. Schlumberger Ltd. CEO Andrew Gould said Friday he didn’t think the North American market would recover before the second half of 2010 (see related story).
In 3Q2009 “we saw customers continue to drill more wells than they completed,” said Lesar. “We now believe that there is an inventory of about 1,300 to 1,500 uncompleted wells in North America. Part of this is due to the low gas price and part is due to customers not wanting to grow their actual production until they have their 2010 hedges in place. While this will be very positive for us when this completion backlog is worked off in 2010, it clearly created a disconnect between demand for drilling-related services versus completion-related services in the third quarter. We expect this to continue into the fourth quarter.”
Halliburton expects the industry to see “accelerating production declines in the coming months in response to reduced drilling activities,” but “we don’t believe these declines will be adequate to provide a meaningful near-term correction of the current supply and demand imbalance,” Lesar told analysts.
Despite the fall-off in business, Halliburton’s technological expertise is paying dividends in the shale plays, said Lesar.
“In our view, much of the industry’s existing stimulation equipment is unsuitable for the lower depths and pressures of the new shale plays,” he said. “We believe that the continued use of suboptimal equipment by the oil service industry for these harsh shale environments is unsustainable. This will facilitate the absorption of this oversupplied equipment situation in the market as equipment is much more quickly used up…”
Tim Probert, president of Halliburton’s Drilling and Evaluation Division & Corporate Development, told analysts that a “combination of high pressures and high temperature and long stages are really driving the wear and tear equation…This is a source of potential using up of equipment, if you like, and restricting the amount of capacity that is ultimately going to be available.
“It really benefits those and certainly rewards those who have strong maintenance programs and those that are continuing to invest in making sure that their technology is up to date just to service these wells…In some respects it’s not a lot different with drilling equipment either, so I think it’s just a general source of the tougher, more complex wells which require more service intensity than we have historically seen.”
The Tudor, Pickering, Holt & Co. Securities Inc. (TPH) Weekly Rig Count, issued last Monday, said U.S. publicly traded operators have driven most of the uptick in recent reported rig counts.
“Based on the familiar mix…of supply, storage and demand, it’s our view that the North America cycle could be consistent with that of the 2002 recovery,” Probert said. “In 2002 gas-directed rig counts rebounded from trough levels and within range-bound for around 33 weeks versus being range-bound for around 17 weeks at this point in the 2009 cycle. If we follow this pattern, then drilling activity may remain at restrained levels into the first half of 2010 before demonstrating a meaningful increase.
“Complicating factors in the recovery include shut-in wells and the impact of the 1,300 to 1,500 wells [that] have been drilled and not completed. The largest concentration of these appears to be in the Barnett [shale]. For reference, there were approximately 4,200 gas well completions in the second quarter, down sharply from last year. Accordingly, the inventory of wells is now becoming statistically significant and could represent 7,000 or more frac [hydraulic fracture] stages.”
Asked about the controversy over frac fluids (see related story), Probert said, “I think clearly, studies that have taken place through the years have really detected no evidence that fracturing has any impact to drinking water sources, which has been the primary focus of this discussion since its inception 60 years ago or so. So we’re continuing to investigate opportunities within our technology to minimize exposure.”
Earlier this month Halliburton introduced a chemical scoring index through the Society of Petroleum Engineers. The index, said Probert, “provides a benchmark metric on the relative environmental performance of our suite of fluids and enables our customers to really make a selection of treatments based on the balance between reservoir performance and environmental performance. And so we certainly anticipate this becoming an industry benchmark, which we hope will drive an increased awareness in environmental issues and stewardship and at the same time provide us with an opportunity to continue to advance the science surrounding improving our customers’ performance of their wells.”
Halliburton has “figured out a way to most efficiently frac wells,” Lesar noted. “The level of activity to date in the Haynesville [shale] hasn’t allowed us to be able to get that model precisely where we want it. We certainly are making progress in that area. But I think if you couple a relatively inefficient way of fracing right now with the way over capacity of competitors that are in those markets, it really makes for a very, very fierce competitive situation and we’re well suited to fight in a marketplace like that.”
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