A continued overcapacity in land pressure pumping services, as well as no relief in natural gas pricing, will impact Halliburton Co.’s North American business again this year, CEO Dave Lesar said Friday.

The Houston operator has come up for air following a volatile 2012, which saw onshore explorers leaping from gas targets to more lucrative liquids and oil basins while oilfield operators chased them. Gulf of Mexico business steadily improves, but the land sector faces a long list of challenges, Lesar said.

The international business is beating expectations, but the U.S. and Canadian onshore sector still is facing headwinds through at least the first half of this year, he told analysts during a conference call.

Halliburton’s management team believes the final three months of 2012 “marked the bottom” for U.S. margins, he said. The natural gas rig count should “improve from fourth quarter levels, but it will be down slightly compared to 2012.” Most of the impact is seen in the first six months, as prices continue to slump.

The company remains “optimistic” that the natural gas sector will come roaring back, but it won’t be this year, said the CEO. Halliburton is the largest pressure pumping supplier for hydraulic fracturing (fracking) in the United States, and an oversupply of equipment cut into profits.

“We still believe strongly in the long-term fundamentals of the gas business,” said Lesar. “We have stayed with those customers in the natural gas basins…This strategy has created a deep relationship with those customers, and it positions us when gas activity rebounds.”

The decision to remain in the domestic gas basins has had a “negative, ongoing impact on margins, but we believe it is the right decision for us in the long-run.”

Many of Halliburton’s onshore competitors “are operating at the floor,” but “excess capacity is falling…We are expecting the industry to add hardly any capacity this year. Over time, we expect to see normal horsepower due to normal attrition. It will help with more oil drilling, but without a significant uptick in natural gas, it’s difficult to see a path for fracking to reach an equivalent this year.”

Natural gas “is not to be an activity driver this year,” said Lesar. The gas rig count “has flattened, but if we see any meaningful uptick in natural gas activity, it likely will not occur until the second half of this year.”

Halliburton last year made a poor strategic decision to stock up on guar gum from India, an additive used in fracking fluids. However, the market fell sharply, leaving the company with a product that was more expensive than it was worth (see Shale Daily, July 24, 2012).

The higher priced guar should be gone before the end of March, but the lessons learned provided a “silver lining,” said Lesar. Halliburton turned to technology and reported stronger sales for its lower-priced artificial fluid additive, PermStim, which replaces guar gum in some applications. Once the guar oversupply is exhausted, Halliburton will be back in the guar market, but it expects to increase sales of the artificial replacement.

Halliburton last year also faced costs with the roll out of its “Frac of the Future” equipment initiative, which is designed to reduce crews and lift efficiency at well sites (see Shale Daily, Oct. 18, 2011). The upfront roll-out costs temporarily had a negative impact on last year’s profits, said COO Jeff Miller. Also adding to costs was a decision to stack equipment in 4Q2012 because the pricing just wasn’t there, he said.

North America revenue was down 5% in 4Q2012 from 3Q2012, which was “in line” with the sequential 5% decrease in the U.S. land rig count. Domestic operating income fell 22% sequentially, “driven mainly by an unusually high post-Thanksgiving decline in activity levels with key customers, increased consumption of our high priced supply of guar, and continued pricing pressure around hydraulic fracturing contracts,” said Lesar.

“We expect to see continued pricing pressure as we renew the last tranche of stimulation contracts” for this year, he said. About 80% of Halliburton’s contracts have been renewed, but if contracts prove difficult to retain, the company may resort to month-to-month or quarterly contracts until business improves.

Profits in 4Q2012 declined 26% year/year but still beat Wall Street expectations on international activity growth, which offset North American weakness. Earnings totaled $669 million (72 cents/share) versus year-ago profits of $906 million (98 cents). Earnings from continuing operations fell to 63 cents from 98 cents, while revenue rose 3.2% to $7.29 billion.

In North America completion and production (C&P) revenue climbed 1% sequentially, in part because of higher activity in the Gulf of Mexico (GOM), which offset the U.S. land market. Excluding the 3Q2012 acquisition-related charges, North America C&P operating income fell $108 million, or 26%, sequentially on seasonal declines, higher costs and pricing pressures.

Tudor, Pickering, Holt & Co.’s Jeff Tillery and Byron Pope said Friday the quarterly results were impressive.

“We’d really beat up our 4Q2012 North American C&P margin assumptions, which were down nearly 600 basis points quarter/quarter, so we’re not surprised to see some outperformance on that front…2013 growth rates won’t be as robust but we should still see a ballpark of 30% year/year profit growth…and corporate earnings growth materializes as North American profitability headwind flattens out.”

The North American drilling results “were a fair bit lower…as the revenue decline was nearly in-line with the U.S. rig count,” which were expected to be offset by the GOM growth and a Canadian seasonal uptick. “All in, North America outperformed our expectations due to C&P margins contracting only 310 bps quarter/quarter instead of the 570 bps we’d modeled.”