Oilfield service providers unlikely to see expected US rebound in 1Q


Oilfield service providers unlikely to see expected US rebound in 1Q


Oilfield services providers, which helped unleash America's new oil and gas bounty, struggled to grow United States profits through last year as low natural gas prices curtailed drilling. Now, it looks like a widely expected rebound in the 1Q 2013 is not happening.

Schlumberger, Baker Hughes and Halliburton provide the specialized technology needed to coax oil and gas out of shale including the key process of drilling horizontal wells deep underground. But that activity saw a relatively unprofitable end to 2012, as the exploration and production firms these companies work for work for pulled back sharply in order to stay within budget.

Executives had said the number of rigs working would likely be lower in 2013 than in 2012 overall, but they expected the 1Q to be better than the 4Q 2012. Citing feedback from customers, Schlumberger CEO Paal Kibsgaard said in an earnings call in January that the number of rigs drilling for oil and natural gas in North America would bounce back by 100 to 150 rigs during the quarter after a sharp decline in 4Q. Halliburton CEO Dave Lesar also said the North American rig count would "continue to grow from current levels" as oil companies started the year afresh with new capital budgets.

But that hasn't happened. The United States land rig count fell about 3% in the 1Q 2013 from the 4Q 2012, and was 13% lower than in the previous year. Mr. Kibsgaard said at a conference last month that activity has been weaker than expected in North America and profit margins will therefore suffer.

The continued weakness in North America operations will be more evident once earnings figures for 1Q start coming out this week. Schlumberger and Baker Hughes report in this week while Halliburton will posts earnings next week.

Credit Suisse analyst Jim Wicklund said expectations of a rig count rebound were misguided, unpredictable and unfavorable weather means the 1Q is normally a slow time of year with exploration and production companies in no hurry to blow through their budgets, he said. "I can tell you I have a date with Miss America tonight, and if you believed it and are terribly disappointed, shame on you" he said, adding that predictions that more than 100 rigs would get back to work in 1Q should have been equally eyebrow-raising.

To be sure, oilfield companies are still making a lot of money. Analysts say red-hot activity in offshore and international markets should give Schlumberger and Halliburton a boost to offset their United States drilling woes.

And rig counts don't tell the whole story. Even though drilling of new wells is down, work done to get a well ready for production has increased as operators restart projects that were put on hold as budgets tightened at the end of the year. Though the market for services like pressure pumping remains crowded, Raymond James analyst Marshall Adkins said companies that do completion work and not just drilling are in a better position.

Nevertheless, North America accounts for more than half the revenue collected by Halliburton and Baker Hughes, and about a third of Schlumberger's, and the expected weakness has led some analysts to lower their forecasts for service company earnings.

How quickly North American drilling will recover is the big question mark going forward. Simmons analyst Bill Herbert wrote in a research note that "at this juncture, in our view, it's better to assume slower versus faster" with exploration and production companies proceeding very cautiously before making any moves. A recent pullback that sent United States oil prices below the $90 per barrel mark could also have some impact on oilfield services producers' bottom lines, and their outlook.

Mr. Herbert added that oil companies are likely to be restrained on upcoming earnings conference calls, and reluctant to commit to increasing capital spending.

"If oil prices were to weaken further and stay weak for more than a period of weeks, that's going to grow to be quite concerning" he said.

Dow Jones Newswires

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