By Alison Sider
Oilfield services providers, which helped unleash America's new
oil and gas bounty, struggled to grow U.S. profits through last
year as low natural gas prices curtailed drilling. Now, it looks
like a widely expected rebound in the first quarter of 2013 is not
happening.
Oilfield service giants Schlumberger Ltd. (SLB), Baker Hughes
Inc (BHI) and Halliburton Co. (HAL) 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 first
quarter to be better than the fourth quarter of 2012. Citing
feedback from customers, Schlumberger Chief Executive 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
the fourth quarter. Halliburton Chief Executive 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 U.S. land rig count fell about 3%
in the first quarter of 2013 from the fourth quarter of 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 the first quarter start coming
out this week. Schlumberger and Baker Hughes report on Friday.
Halliburton, the second-largest oilfield services company after
Schlumberger, posts earnings next week. Analysts polled by Thomson
Reuters expect Schlumberger to post earnings of 99 cents a share,
up 1% from last year. Halliburton earnings are estimated at 57
cents per share, down 36%, and Baker Hughes earnings are forecast
at 62 cents per share, down 28%.
Credit Suisse analyst Jim Wicklund said expectations of a rig
count rebound were misguided--unpredictable and unfavorable weather
means the first quarter 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 the first quarter 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 large, diversified companies such as Schlumberger and
Halliburton a boost to offset their U.S. 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.
Argus Research analyst Phil Weiss recommends Schlumberger as a
stock to buy, but trimmed his estimate of the company's earnings in
2013 by 10 cents per share to $4.70, to reflect
slower-than-expected activity and lower margins. Mr. Weiss also
lowered his 2013 estimate for Halliburton's annual earnings from
$3.20 per share to $3.05. ISI Group analyst Jud Bailey also trimmed
his earnings estimates by 5 to 9 cents per share for each of the
four large cap services companies.
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 U.S. 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.
Write to Alison Sider at alison.sider@dowjones.com
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