Drought-related water shortages in the Midcontinent, flooding in the Marcellus Shale and a slow recovery in the Gulf of Mexico (GOM) failed to deter Halliburton Co.’s North American operations during 3Q2011, CEO Dave Lesar said Monday.
The world’s second largest oilfield services company (after Schlumberger Ltd.) set records for revenue and operating income in the latest period, with the biggest gains in the Western Hemisphere, he told energy analysts during a conference call. Net income reached $683 million (74 cents/share) from $544 million (60 cents) in 3Q2010 and compared with $739 million (80 cents) in 2Q2011.
North American revenue rose by 13% and operating income was up 14% from 2Q2011. Incremental operating revenue was above 30%. Operating income in North America exceeded $1 billion for the first time in the company’s history.
However, the company’s quarter margins in North America were negatively impacted by cost increases for materials, logistics and labor, as well as weather in the Marcellus Shale and water shortages in the Midcontinent, Lesar noted. Sequential gains primarily were driven “by strong activity in the Bakken, Eagle Ford and Permian Basin areas, along with the seasonal recovery in Canada.”
The global economic turmoil has affected Halliburton — but not as much as smaller operators, said the CEO.
“The recent drop in oil prices and related declines in equity markets have been unsettling to investors,” Lesar noted. However, “despite short-term macroeconomic concerns, I continue to believe in the long-term prospects for our business…
“In North America, we see several meaningful differences from prior cycles, including a high level of oil-directed activity, an increased presence of large international customers and strong credit availability, that provide us continued confidence in the resiliency of the North America market.”
The domestic gas drilling market has not been as fortunate, he said. Gas drilling was flat from the second quarter, and “we continue to believe there is a risk of decreased activity, despite the fact that gas demand for power increased this year in part because of the harsh summer in various regions,” said the CEO.
“However, if demand were to moderate, we’d expect the gas rig count could as well. If it were to decline, at least a portion [of drilling services] would be redeployed to liquids-rich plays. We’ve already seen this to a degree, like in the Haynesville [shale] where services have left for other regions.”
Some exploration and production (E&P) companies “could reduce their capital spending, especially among private operators. We could see a moderation of growth or a decrease in the rig count. We do not expect to see a downturn like 2008. In fact, it would be a big mistake to make a comparison to the 2008 cycle because of several significant differences.”
For instance, “North America is a two-commodity market for the first time in well over a decade,” said Lesar. Natural gas had been the “sole driver” until tight oil plays were accessed. “Oil has created a differential and customers today have a balanced portfolio allowing them to shift their resources.”
E&Ps today also have easier access to equity markets, said the CEO. “In the previous downturn, they couldn’t access the markets, which halted business.”
Because Halliburton is aligned with larger customers, the company is “not as affected by the economic turmoil,” said Lesar. “These companies have more stable activity and are not vulnerable to short-term fluctuations in commodity prices…” The contracts in North America are “more and more like in the international markets, which are long-term utilization-based contracts. In the past the majority were through pricing agreements without volume commitments.”
Worldwide the company expects to hire close to 17,000 people this year, with most of the hires — an estimated 12,000 — in the United States. Demand is strong for pressure pumping crews, which handle the hydraulic fracturing (fracking) services that are in such demand in both oil and gas plays.
For Halliburton that’s all to the good, with most of its fracking crews “contracted with a minimum volume through the duration of the contract,” said Lesar. “All new fleets have similar new contracts. We are currently engaged in a new type of contract that gives them more flexibility and assures us of a certain volume of work and efficiency level.”
Still, the company is working on ways to reduce costs, especially in pressure pumping services. Through its “frack of the future” strategy, the company has reduced its average crew size by 10% since January. More efficiencies are under way. However, in any case, the pressure pumping market is “still undersupplied,” Lesar noted.
“All of these factors provide me with confidence in the resiliency of the North American market. If activity were to decline, we have one advantage in that we build and own our equipment and so we control the flow in the marketplace. If the market were tightening, we could curtail our build program.”
Halliburton also is a top provider in the offshore and it’s continuing to see stronger activity in the GOM with a “higher level of permit approval,” noted Lesar. “We believe we will see more deepwater rigs over the next few quarters, which is a positive trend. We are cautiously optimistic. We need to see a sustained higher level of permit applications to get back to pre-Macondo levels. Customers now have a better understanding” of what regulators want to see in the permit applications.
“As activity increases, we will continue to benefit.” Halliburton’s new GOM deepwater awards “approach 40%, which is higher than typical market share.”
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