Natural gas drillers continue to generate returns in lower-cost unconventional basins, but “range-bound gas prices…may potentially disrupt current activity” in the second half of the year, Halliburton CEO Dave Lesar said Monday.

“We do not anticipate a major correction in the rig count, but prices will be range-bound for a significant time,” Lesar told energy analysts during a conference call. “We see limited substantial improvements in the margins in our North American business for a few quarters.”

Halliburton’s North American operations in the first three months of the year eclipsed its international business mostly because of the boost in onshore shale gas and oil activity. After laying off around 6,000 employees last year during the downturn, Halliburton in the first three months hired 1,200 people to staff U.S. operations.

Shale basin drilling in the United States is continuing “unabated,” allowing the service company to recoup some of the costs of services it lost when the economy went south, said the CEO. Now Halliburton is able to raise some of its prices by “leveraging completion demand and pulling through other services,” he said.

When asked by an analyst whether the company was restraining its stimulation business to increase prices, Lesar said, “Absolutely not…We are just getting back to where we are returning to a reasonable return on those assets. We had pricing pushed down so far that frankly we were not getting our capital costs back on those assets. We are just now breaking through that point…

“Drilling in unconventional basins is taking precedence over conventional drilling because it generates better returns,” he said. U.S. gas drillers have barely slowed their onshore drilling activity this year and Halliburton sees only a “moderate rate of unconventional rig decline” in the short term.

According to Monday’s Weekly Rig Roundup by Tudor, Pickering, Holt & Co. (TPH), U.S. land activity is “still climbing” with three sources showing week/week (w/w) gains for the week ending April 17. RigData reported a gain of 41 rigs, Smith Bits said two more rigs were added, and Baker Hughes Inc. showed a gain of 14 rigs.

By hydrocarbon target, TPH said the uptick in onshore drilling was weighted to oil/liquids activity. The gas rig count fell by 10 rigs w/w, while “oil/gas,” or natural gas liquids-directed drilling gained 30 rigs. The U.S. onshore oil rig count added 15 rigs; six “unclassified” rigs also were added.

The liquids-rich plays have become a definite go-to for drillers, said Lesar. However, it’s a double-edged sword for service operators because the unconventional liquids plays “match the intensity of unconventional gas plays” requiring advanced hydraulic fracturing fluids and high drilling pressures.

“In the oil-rich gas plays we’ve seen oil-directed rigs more than double from the trough from 2009, growth we have not seen since the 1990s,” said Halliburton’s Tim Probert, president of Global Business Lines and Corporate Development.

“In the wet basins the activity has been quite high,” Probert said. “These assets generate higher returns than dry gas because of the liquids content. But extraction can be difficult. The plays are increasingly being drilled horizontally, which can be quite intensive.”

Halliburton expects the North American rig count “to be rangebound over the next couple of quarters,” said Probert. “We have been surprised by the speed of the shift to liquids-rich activity. Thirty-five percent of the drilling is now directed in that liquid hydrocarbon range.”

The company is “seeing a couple of things” as drillers shift to oilier plays, said Probert.

“There is pressure on dry gas, but many of the producers have strong hedge positions in place,” he said. “They will drill to hold a lease and then shift to liquids plays, and most of them are now discussing that in some detail. Generally speaking, we are seeing dry gas dropping a little and some strength in liquids [drilling].”

Probert said there “clearly” is some tightening in the gas drilling market. “There’s a general sense that customers are getting their work done in their time frame. But they are more oriented toward our stimulation equipment than every other product line.

“During the course of this year, we expect to see a significant rebalance of equipment focusing on areas where there are the most opportunities for the short, medium and long term. They are relocating equipment where it makes sense to do so.”

Halliburton is “adding a certain degree of maintenance capital to the fleet to be sure we can meet the challenges of large horsepower spreads in place today,” Probert said.

Unconventional plays “still continue to be very disruptive to equipment,” Lesar noted. “You need to build a fair amount of equipment just to stay in place with horsepower capacity. The turnover of your equipment and maintenance costs are dramatically higher than they have been, and we have to bring more equipment in just to replace the fleet that [unconventional drilling] is grinding up.”

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