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Oil Field Service Companies Enjoying Turnaround

July 23, 2008

By Brett Clanton, Houston Chronicle

Jul. 23–A bigger-than-expected rebound in land drilling in North America this year is giving a boost to several Houston oil field service companies that struggled with a downturn on the continent in 2007.

In quarterly profit reports Tuesday, Halliburton Co., Baker Hughes and BJ Services became the latest firms to signal an improving outlook domestically, following rivals Schlumberger and Weatherford International, which previously reported North American gains for the quarter.

The turnaround in North America comes as higher natural gas prices and the emergence of major unconventional resource plays give oil companies greater incentive to invest in exploration.

Growing demand for drilling rigs and other equipment after a rush of new building in recent years has also helped service companies improve pricing power after months of steady declines, as well as offset rising energy and materials costs.

The situation has, in some cases, led service companies to increase capital spending in North America after focusing on higher-growth areas overseas in recent years. Some firms are also more upbeat about prospects for the second half of the year and 2009.

“We don’t see anything out there right now that would say it’s not sustainable,” Halliburton CEO Dave Lesar said in a conference call Tuesday with financial analysts, describing a goal to increase revenue by at least 20 percent a year.

Yet a second quarter report Tuesday from Nabors Industries, the world’s largest land driller, offered a reminder that North America is still recovering from a challenging period.

The Hamilton, Bermuda-based company, which is run from offices in Houston, said income fell almost 15 percent to $194.4 million, 67 cents per share, on weaker rig demand in Canada and the U.S.

“It is now clear that our operating income bottomed out in the second quarter and the outlook for the second half and beyond is improving more rapidly than we had anticipated,” Nabors Chief Executive Gene Isenberg said in the statement.

Neal Dingmann, an industry analyst with investment bank Dahlman Rose & Co., wonders how durable the nascent North American comeback is now that natural gas prices are beginning to come down from recent highs.

In early July, natural gas reached $13.58 per British thermal unit, more than double its price in late August 2007, he said. On Tuesday, the price fell closer to $10, but still remains high by historical standards, Dingmann said.

“The real question is how is this going to hold up now that gas has given a lot of this back?” he said.

Dan Pickering, analyst with Tudor, Pickering, Holt & Co. Securities in Houston, believes North America will benefit at least into 2009. He said exploration and production companies including Chesapeake Energy, EOG Resources and others have indicated they will ramp up spending in the region, particularly in promising areas like the Haynesville shale play in East Texas, southwest Arkansas and northwest Louisiana.

“I think the visibility is improving because the oil field service customers are signaling higher levels of activity,” he said.

Halliburton and some other major U.S. oil field services companies are heavily involved in North America, where results are closely tied to the ups and downs of natural gas prices. They have been trying to expand their global reach in the mold of Houston- and Paris-based Schlumberger, which has customers in virtually every oil-producing state in the world.

But in the second-quarter, Halliburton benefited from its large presence in North America.

Revenue in the region grew 14 percent and helped contribute to a 6 percent rise in operating income to $949 million for the second quarter.

Halliburton’s net income dropped 67 percent from the same period a year ago, when the company posted a $1 billion gain from its split with former subsidiary KBR.

But the company posted record revenue and said it expects to see continued growth.

Houston’s Baker Hughes said second-quarter profit rose nearly 9 percent to $379.3 million, $1.23 a share, from $349.6 million, $1.09 a share, a year earlier.

Chief Executive Chad Deaton said the better results came as activity levels in the U.S. improved, particularly with horizontal drilling on land.

Houston-based BJ Services said net income for the April-June quarter dropped 16 percent to $141.8 million, or 48 cents a share, from $168.3 million, or 57 cents, a year earlier.

That beat Wall Street expectations.

Chairman and CEO Bill Stewart said the quarter marked a “significant milestone” partly because the company saw prices and profit margins stabilize in the U.S., where he said drilling activity exceeded expectations during the quarter.

brett.clanton@chron.com

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