Strong earnings from U.S. natural gas and oil shale operations in 2Q2010 lifted several of the biggest oilfield service company profits, but rough seas are ahead for U.S. offshore operators because of the Gulf of Mexico (GOM) drilling moratorium, Halliburton CEO Dave Lesar said last week.
Halliburton’s net profits in 2Q2010 jumped sequentially to $480 million (53 cents/share) from $206 million (23 cents), and it said its strongest demand for services was in the United States.
“Increased horizontal drilling and the development of liquids-rich reservoirs amplified service intensity, as longer horizontal laterals increased the demand for premium tools, more sophisticated fluid systems and the amount of horsepower needed for completions work,” Lesar said.
However, he cautioned — as did other service company management teams last week — that the oversupplied U.S. gas market may moderate domestic earnings in the second half of this year.
“Going forward, we believe North America land rig count growth may moderate as activity in the dry gas basins may slow due to weak natural gas fundamentals, which should be partially offset by the continued growth of oil- and liquids-rich reservoirs,” Lesar said.
Lesar and other chiefs also warned about how the federal moratorium may affect future GOM drilling.
“The tragic incident that occurred in the Gulf of Mexico and the subsequent suspension of deepwater drilling, we believe, will usher in a new regulatory climate and will have a profound impact on how deepwater drilling is performed,” Lesar said.
Halliburton already has begun “redeploying our people and equipment to other areas of stable or increasing activity,” he said.
However, “the events in the Gulf of Mexico have not stifled our enthusiasm for increased deepwater activity in the coming years,” said Lesar. “Yes, we will try to move people, we will move equipment, but we will maintain our vast Gulf of Mexico facilities, lab and manufacturing…on the basis that the Gulf is going to come back, which we believe it will.
“It will be a drag on earnings for a period of time, but in our view, when the Gulf comes up again, we will have to have that stuff [equipment] in place…and we can recalibrate it and reconstitute it at some time in the future…”
Asked what he was hearing from offshore producers about the kinds of regulations they are preparing for, Lesar said the “discussions are many, the conclusions are varied…I think that nobody believes that they will be out of business in the Gulf of Mexico a year from now.
“The big concern is the ability to get deepwater rigs to come back into the [U.S.] deepwater market” once the moratorium is lifted.” The equipment by the time the moratorium is lifted could be “absorbed in other parts of the world…” and the concerns about coming back into the GOM will be centered on the new insurance costs and the new regulations.
Halliburton is forecasting that the U.S. deepwater rig count will fall almost by half to 17 rigs. “In the next 12 months I think there will be very little discussion taking place about the ability to ramp up [in the GOM] anywhere near the level where we were at,” said Lesar.
Schlumberger Ltd. on Friday also said its 2Q2010 revenue was lifted by strong onshore North American land operations, which totaled $1.11 billion. The U.S. Land GeoMarket segment surged 35% from the first three months of this year “driven by a 13% increase in [the] rig count, high service intensity in unconventional oil and gas reservoirs and continued pricing improvements for well services technologies,” said CEO Andrew Gould.
However, North American revenues were impacted by lower revenue from the Canadian market following the seasonal spring break-up, as well as a drop-off in GOM revenue “as a consequence of the moratorium on deepwater drilling,” said Gould.
“In the deepwater Gulf of Mexico we are not planning for any resumption of drilling activity this year,” he said. “In deepwater activity elsewhere we have not seen, nor do we expect to see, any significant delays or program reductions as a result of the U.S. Gulf of Mexico drilling moratorium. Internationally, operators, contractors and regulatory bodies have stepped up maintenance and verification of key well control equipment and procedures but have not restricted actual drilling activity.”
At Schlumberger, “we believe that the contribution of deepwater discoveries has been, and will remain, very significant to future hydrocarbon production…We therefore welcome the current efforts to better understand and control the risks associated with these types of operations. While additional control and oversight will undoubtedly add cost, we expect this will be offset in the long run by improvements in operating procedures and technology.”
Like Lesar, Gould said “natural gas economics remain more challenging, as supply of both LNG [liquefied natural gas] and unconventional gas in the U.S. would appear to continue to outstrip the demand recovery. Overall, therefore, we see the current trend of a slow but sure recovery in activity as likely to continue without change until we have a clearer view of the sustainability of the recovery in the world economy.”
The U.S. land market also helped Weatherford International Ltd.’s earnings soar in 2Q2010, with North American revenue up 61% versus the year-ago period and 3% sequentially. Stronger performance in the U.S. onshore “more than offset Canada’s traditional seasonal decline and one month of severely reduced activity in the Gulf of Mexico,” said CEO Bernard J. Duroc-Danner.
However, U.S. offshore operator Noble Corp., based in Switzerland, saw its quarterly profits plummet 44% on lower contract and drilling services revenue. Results sharply missed Wall Street’s forecasts.
“Noble’s second quarter revenues declined due to a combination of factors, not the least of which was the government-ordered drilling limitations in the U.S. Gulf of Mexico,” said CEO David W. Williams. “However, we have moved quickly on a variety of fronts to protect our backlog and shareholder value.”
Last month Noble signaled that the deepwater was still viable when it agreed to buy privately held FDR Holdings Ltd., also known as Frontier, in a transaction worth an estimated $2.16 billion (see NGI, July 5). In turn, Frontier customer Royal Dutch Shell plc signed new deepwater drilling contracts with Noble.
“Despite an uncertain environment in the U.S. Gulf, drilling continues around the world both in shallow and deepwater,” said Williams. “We intend to maintain our focus on safety as we plan for the rapid integration of Frontier’s operations, and we are generally optimistic about opportunities during the remainder of the year.”
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