North American drilling activity is showing signs of improvement after bottoming out in the summer, but natural gas prices indicate “little sign of meaningful near-term recovery” and “caution abounds” for the next six months to a year, two oilfield service CEOs are warning.

BJ Services Co., whose advanced technology is credited with increasing natural gas shale production, reported Monday that it swung to a loss in fiscal 4Q2009 because of low demand for its services. The Houston-based services provider, which is being acquired by Baker Hughes Inc. (BHI) for $5.5 billion (see Daily GPI, Sept. 1), reported a loss of $9.9 million (minus 3 cents/share) in fiscal 4Q2009, compared with prior-year profit of $168.1 million (57 cents). Revenue fell 42% to $878.2 million and was down 13% sequentially from 3Q2009.

“Our fourth quarter results reflected some sequential improvement in U.S. drilling activity, particularly with respect to oil exploration,” said CEO Bill Stewart. U.S. drilling activity, as measured by average active drilling rigs, rose 4% sequentially but declined by half (51%) from the same period a year ago. The gains were on the oil side, said the CEO.

“Natural gas drilling was 5% lower sequentially, and North America natural gas prices show little sign of meaningful near-term recovery,” Stewart said. “While we experienced meaningful sequential improvement and generally stable U.S. pricing during the quarter, near-term market conditions overall are still very challenging.”

Tulsa-based contract driller Helmerich & Payne Inc. (H&P) also saw profits fall handily from a year ago, with fiscal 4Q2009 net income of $51.5 million (48 cents/share) and operating revenues of $362.2 million. In the same period a year ago H&P earned $126.5 million ($1.18) and operating revenues reached $583.7 million.

Rig utilization for H&P’s U.S. land segment was 55% in July, August and September, compared with 98% in the same period of 2008. The company now expects an average of 95 rigs to remain under term contracts during the first fiscal quarter of 2010, and an average of 90 rigs to remain under term contracts during all of fiscal 2010.

“We’ve been encouraged by several trends we’ve seen in the market since the last quarterly call,” CEO Hans Helmerich told energy analysts during a conference call last Thursday. “After natural gas prices drifted down in September, they’ve recovered nicely in the last two months. The rig counts are responding to pricing. Oil-directed drilling has more than doubled, and after the gas-oriented drilling bottomed, it’s increased by 10% since the last call” in July.

“Once the rig count establishes an upward move, we’ll see a positive trend of recovery,” he said. “It’s a typical pattern, but we’re cautious of the up-cycle for the next six to nine months.”

A big concern, Helmerich said, is U.S. gas demand in 2010. “Industrial demand got hammered this past year, and it has to rebound for there to be a real economic recovery in this country…More than that, we would like to see a real winter; it would sure help longer-term opportunities for natural gas, and it would help if there were inroads into the transportation market.”

With a surplus of U.S. gas supplies, “caution abounds, especially in the short term,” Helmerich said. “There’s a well known shale gas potential, and we’re at an all-time high inventory level, buttressed by a backlog of uncompleted wells. Some estimate there are 1,500 deferred wells in the U.S.”

Future liquefied natural gas (LNG) imports “are another ongoing source of added supply potential,” he told analysts. “Worldwide capacity jumped by a third in the last two years, and it’s uncertain how much will be landing in the U.S. While these concerns set up a possible second bottom, the more likely outcome is it will flatten the curve and push it to the right, avoiding typical volatility, which is a good thing.

“The worst thing is another big price bite; that’s a big conversation with customers. There’s a shared belief to keep gas at a reasonable price. One customer remarked recently that in this environment prices are range-bound between $4 and $7. Efficiency is king…and efficiency savings in the high prices of the up-cycles cover a multitude of sins.

“Take all that away, and the business is tougher. Fewer overall rigs are required to maintain the supply balance. Those rigs are tasked with more challenging wells. Customers demand for consistent performance, efficiency gains, and they are not satisfied with a day rate discount for substandard performance.”

U.S. drilling activity rose for the fifth consecutive week for the week ending Nov. 20, up 12 to 1,113, according to BHI. For the same week a year ago there were 1,941 rigs in operation in the United States. An estimated 726 rigs were drilling for natural gas at the end of last week, down two from the previous week. Horizontal drilling rose by 19 rigs to 531, while directional drilling dropped five to 189.

“Producers had scaled back oil and gas drilling operations over the past several months in the midst of falling commodity prices and tighter access to credit,” Zacks Equity Research analysts said Monday. “However, during recent weeks, there have been signs that the companies were beginning to bring rigs back on line (especially oil rigs) amid signs of economic stabilization that could drive up energy demand. This pushed the nationwide rig count above 1,100 working units for the week ended Nov. 13, the first time since March.

“The overall picture, though, remains weak, particularly for natural gas, whose inventories have recently hit a new record high of 3.83 Tcf and is threatening to test the maximum capacity of 3.89 Tcf. The supply picture is expected to reverse in the coming months as producers bet on colder weather and the lagging effect of the sharp drop in domestic drilling activity takes hold.”

Until higher prices take hold, “natural gas woes (especially in North America) will continue to haunt energy service firms like Halliburton Co., Schlumberger Ltd., BHI, Smith International Inc., National-Oilwell Varco and Weatherford International Ltd.,” the Zacks team wrote.

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