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Oilfield service earnings shifting away from North America

After two years of robust growth, major oilfield service companies saw their North American margins shrink in the first half of 2012, according to a new study by IHS

However, margins from activity outside the US are growing, and rig counts outside North America are projected to be up 8% this year. By contrast, the US natural gas rig count declined 18% in the second quarter, and is down 43% from its high in October of 2011.

The big winners of the international shift are Baker Hughes, Halliburton, Schlumberger and Weatherford, IHS says.

The four largest international service companies saw margins fall in North America because of higher costs for guar gum used in hydraulic fracturing (fracking) fluids, and increased competition pushing prices for fracking services lower. At the same time, each saw higher costs associated with relocating equipment and personnel from dry gas to liquids-rich shale basins in the US, according to IHS.

The hydraulic pumping sector has been hit particularly hard because of a buildup of excess pumping capacity, says study author John Parry.

“The good news for these companies is that, while margins in North America are being squeezed, profit margins outside of North America are showing sequential improvement, which are benefitting from improved activity in several regions aided by earlier targeted investments.”

Although North American revenues for the four biggest oilfield service companies rose 24% to $24 billion in the first six months of the year, operating income rose just 8.3% to about $4.8 billion.

By contrast, revenue for the companies outside North America rose 18% to $28.3 billion, and operating income rose 42%, reaching $4.6 billion, according to IHS.

Revenues from North America made up 50.8% of the companies’ total operating income in the first half of 2012, down from 57.6% in 2011.

“While we expect these companies to face tight margins in their North American operations for the remainder of the year, we also anticipate higher margins in other parts of the world to buttress those results and buffer the impact,” Parry said.

Higher costs for guar gum, which rose about 75% since the first quarter, was the primary contributor to Halliburton’s lower North American margins. And things could get worse for the company with an additional 25% cost increase expected in the third quarter for guar gum.

Baker Hughes also felt the pressure from higher guar gum prices. And because of increased competition for pressure pumping it was unable to pass those costs on to customers. Internationally, the company noted its Europe, Africa, Russian and Caspian segments delivered strong results for the second consecutive quarter.

Despite pricing pressures in North America, Weatherford reported second-quarter revenues of $3.8 billion, the highest in company history. Increased activity in Russia and Latin America more than offset a disappointing quarter in North America.

The shift away from North America for the major oilfield services companies is expected to continue. “Due to the uncertain global economic outlook and its impact on oil and gas commodity prices, particularly in North America, we expect the sharp shift in geographic operating income contribution will continue for the remainder of the year,” Parry said.

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