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North American drilling drives Halliburton profits

The rush to drill unconventional wells in North America’s shale basins helped push Halliburton’s third-quarter profits to record levels and bodes well for the oilfield services and supply sector

The Houston-based services company kicked off the reporting season with a 26% jump in third-quarter net profit, to $683 million from $544 million a year before. North American operating income topped $1 billion for the first time in the company’s history. Revenue and operating income were up by 13% and 14%, respectively.

Chief executive David Lesar credited higher margins as well as rising drilling levels for the improvement. The company is also hoping to gain from increased permitting in the Gulf of Mexico as licensing activity returns to pre-Macondo levels in future quarters.

“Strong activity in the Bakken, Eagle Ford and Permian basin drove the sequential growth for the quarter, along with the seasonal recovery from the Canadian spring break-up,” he said.

But wild fires in Canada and floods in North Dakota and Pennsylvania took a bite out of what were already stellar numbers. The company may also face large liabilities stemming from its role in the Macondo disaster – it performed the cement job on the blown-out well – but those issues were not addressed in either the earning release or call.

Surprising strength

Nonetheless, Halliburton’s results add some shine to the battered oilfield services sector, which is showing signs of renewed vitality and pricing leverage as North American drilling surges. As the first big service outfit to report financials, Halliburton’s numbers point to surprising strength given a 13% drop in quarter-over-quarter North American oil prices. And despite depressed natural gas prices, activity levels in both Canada and the US continue to climb.

According to Baker Hughes, rig counts in Canada and the US are up by about 17% over last year to 2,535 active units. Gas drilling remains high, especially in the US, where it accounted for almost half of new wells. A whopping 69% of all drilling is horizontal or directional, which is driving demand for specialised materials and equipment.

Baker Hughes – founded by the late Howard Hughes – makes rock bits and mud systems used in unconventional and offshore drilling. The company will report its third-quarter results on 1 November. Schlumberger’s numbers are released on Friday and Weatherford’s on 25 October.

According to Raymond James financial analysts Darren Horowitz and Kevin Smith, the strong rig counts “should be supportive to our sequential growth assumptions” for all land-based US oilfield services companies. But there may be dark clouds on the horizon.

Halliburton’s Lesar said an uncertain outlook for gas demand could reduce rig counts and shift activity from less profitable regions, such as the Haynesville Shale. “If this demand were to moderate next year, we would expect that the gas rig count could as well,” he said.

Lesar further raised the spectre of cost inflation creeping back in the form of higher wages and prices for materials, although he vowed to offset them with “targeted pricing improvements” – code for shaking producers out of more money.

But it’s unclear if that’s sustainable given the murky economic outlook. Unlike 2008, when both oil and gas prices were riding high, natural gas isn’t expected to recover and oil remains in a perilous limbo. The mid-continent Bakken producers, especially, are receiving discounts of $25 a barrel for their oil compared with North Sea Brent as a result of bottlenecks on the North American pipeline network.

Because the service sector is a trickle-down economy, it relies on the big producers to keep making capital investments. Those budgets will be unveiled in the coming months, but the combination of lower – and more volatile – commodity prices and higher cost inflation must surely be prompting large producers to consider scaling back, or take a more conservative line to live within cash flow.

A big downturn in the US economy would also have a crippling effect. Drillers and services firms took the last crash especially hard and are only now returning to pre-recession levels. In that sense, foisting large price increases onto producers may be the equivalent of shooting itself in the foot.

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