Oil Service Companies Reiterate Long-Term Growth Outlook

NEW YORK (Dow Jones Newswires), October 21, 2008

Major oilfield service companies are reaffirming their ability to increase profits over the long term, a rebuttal to a sharp sell-off in their shares.

Halliburton Co. on Monday said it posted a third-quarter net profit of $687 million excluding a charge related to a retirement of some debt and to a small acquisition. With the charge, the world's second-largest general energy service firm in terms of market capitalization had a loss of $21 million.

Per-share earnings not including the charge came in at 76 cents, slightly beating expectations.

Executives at Halliburton and other oil service companies say they expect business to grow in 2009, thanks to orders from international projects, despite plummeting oil prices and a paralyzed credit market. These firms are paid by energy companies such as Exxon Mobil Corp. to perform the bulk of the field work, ranging from seismic exploration to well maintenance.

"We've not experienced any business impact from equity and credit market volatility, and despite growing prospects of a global economic slowdown ... we continue to believe in the long-term fundamentals of the oil and gas industry," said Halliburton Chief Executive David Lesar.

International growth in oilfield services spending could slow next year, he added.

Lesar was echoing Schlumberger Ltd. CEO Andrew Gould, who gave similar remarks when his company, the world's largest energy service company, released earnings on Friday. Schlumberger's third-quarter earnings matched analysts' average estimate of $1.25 a share. Weatherford International Ltd., the fourth-largest service firm, beat expectations Monday with earnings of 55 cents a share. All three saw profits rise over the previous year.

Baker Hughes Inc., the third-largest company in the group, reports Wednesday.

The results stand in sharp contrast to the recent performance of these companies' shares, which are all off about 40% in the last month. The S&P 500 is down about 18% over the same period.

Investors have taken note of the companies' robust third quarters, however. Gould's forecast of slower growth in 2009 initially sent Schlumberger shares 6% lower on Friday. Halliburton and Weatherford shares jumped 14% and 15%, respectively, on Monday after reporting earnings.

Service company CEOs have sought to address declining oil and share prices by arguing that it will take a year or more of lower oil prices to force the world's largest producers, a conservative bunch, to scale back. They also note that spending on oilfield services can no longer be permanently cut, as massive spending is required even to maintain global oil production at current levels near 90 million barrels a day.

"A decrease in exploration and production spending at this point is going to accelerate non-OPEC decline, which means that as soon as demand flattens or turns around the price of oil is going to go right back up again," said Schlumberger's Gould on Friday.

Accepted Arguments  

Oil service executives are making arguments that are broadly accepted in the energy world and investment community. Even as Lesar and Weatherford CEO Bernard Duroc-Danner gave their outlooks, Exxon and Chevron Corp. executives were telling investors that they don't plan to alter spending in response to lower oil prices.

But the strong long-term outlook does little to brighten what is shaping up to be a shaky first half of 2009. The credit market, which tightened dramatically just after the end of the third quarter, is now expected to limit economic growth worldwide next year. Oil prices are trading near a 14-month low as a result, and are near a level that would render some major projects uneconomical.

Crude futures settled 3.3% higher Monday at $74.25 a barrel on the New York Mercantile Exchange as the Organization of Petroleum Exporting Countries mulled an output cut.

No matter how they phrase it, service companies are facing the very real possibility of cuts to oilfield services spending worldwide for the first time in years.

"For those looking for near-term performance, we have no call" on whether to buy or sell shares in Schlumberger, wrote Bill Herbert, an analyst with Simmons & Co. "For those looking for a compelling long-term buy and hold, buy (Schlumberger)."

Even if spending holds steady overseas, service companies are almost certain to see significant reduction in work from natural gas producers in the U.S. and Canada, the world's largest market for oilfield services. About 10 companies have already announced cuts to 2009 budgets, almost all in the U.S., said Tim Probert, executive vice president for strategy and corporate development at Halliburton.

For now, service companies are responding by closely watching their spending in North America. Schlumberger reduced its 2008 total spending by $100 million, to $3.2 billion, while Weatherford will likely slash its global 2009 budget to between $1.5 billion and $2 billion, from $2.4 billion. Both Schlumberger and Halliburton said it is too early to say whether their 2009 budgets will be affected by the economic downturn.

Analysts expressed concern that cuts in 2009 could hamper Weatherford's ability to take advantage should the producers increase spending in 2010.

"That has more people concerned that if you go and you start to dip, it takes a long time to slow the train, but it also takes maybe even longer to start it up again," said Alan Laws, an analyst with Merrill Lynch & Co.

Copyright (c) 2008 Dow Jones & Company, Inc.

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