Schlumberger Ltd. executives said Friday the move by North American land rigs and service capacity from natural gas fields to liquids-rich basins has accelerated, but the pricing weakness first experienced in the gas fields also has begun to shift to liquids plays.
The oilfield services giant posted profits of $1.3 billion (97 cents/share) in 1Q2012, versus $944 million (69 cents) a year ago. Excluding one-time items, net earnings rose to 98 cents from 71 cents on revenue of $10.61 billion.
Despite the strong quarterly report, Schlumberger’s executive team, which spoke with financial analysts during a conference call on Friday, warned that profit margins for the land business in North America — one of its growth drivers — are beginning to fall.
Crushingly low gas prices have forced producers to flee gas drilling for more profitable oil and liquids-rich basins, which in turn has created logistics obstacles for oilfield services companies — a fact alluded to by competitor Halliburton Co. executives on Wednesday (see Daily GPI, April 20).
Pressure pumping service prices, which are a key component of hydraulic fracturing (fracking) costs in unconventional plays, continue to weaken because of the transition, said CEO Paal Kibsgaard. Even though the oilfields require more services than gas fields (such as more frack stages), oil pumping requires less pressure and less horsepower. In the first three months of the year North American margins declined 409 basis points to 22.8%.
The dynamic in the switch from gas to oil work is “going to contribute to an oversupply of horsepower,” Kibsgaard told analysts. The reduction in pressure pumping prices in the second quarter “is a given.”
U.S. oil growth drove to “record levels,” he said. However, “natural gas is at a 10-year low, and it’s unlikely to recover in the near term.” Schlumberger remains “uncertain” about the outlook for dry gas in North America. “We still expect to see U.S. land activity at 2011 levels, provided the gas [activity] is offset with liquids-rich basins.”
Schlumberger’s business relies on more than land, and North American margins should be offset by higher margins in the Gulf of Mexico, which has returned to pre-moratorium drilling levels, said the CEO. Halliburton also reported optimism about deepwater oilfield services work.
“The Gulf of Mexico grew and our outlook is up for the year on the number of new drilling permits granted,” he said. “The performance there was very strong and reflected in the margins.”
Tudor, Pickering, Holt & Co.’s (TPH) John Lawrence and Jeff Tillery said in a note Friday the earnings report overall offered no surprises, but North America “is a question mark,” with concerns about where the gas activity will bottom and pressure pumping pricing, which were “well telegraphed and widely shared.” As the TPH team said, it isn’t just dry gas where pressure pump pricing is falling, “it is happening in oil/liquids basins as well.”
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