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 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., Baker Hughes Inc. and Halliburton Co. 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.