Oilfield Service Companies See More Stable Demand

HOUSTON (Dow Jones), Oct. 23, 2009

Oilfield service providers are seeing more stable demand but so far have resisted calling an end to the industry-wide slump that weighed on profits and forced a rash of cost-cutting measures earlier this year.

Companies like Halliburton Co., Weatherford International Ltd. and Schlumberger Ltd. reported drastically lower third-quarter earnings from a year earlier amid a glut in the North American natural gas market and uncertainty about how future oil prices may affect international activity.

"We see continuing stabilization of activity around the world," Andrew Gould, chairman and chief executive of the world's largest oilfield services company, Schlumberger, said in a conference call Friday. "However, this will not be uniform across either geographies or for services by commodity type."

Stable oil prices of about $80 a barrel over the next six months would ratchet up demand for services, and a rebound in industrial output would help tighten "oversupplied" natural gas markets, Gould added.

Halliburton said it is now seeing signs that pricing has bottomed in North America but that robust supplies of natural gas could keep a lid on drilling activity.

The sector, analysts with Tudor Pickering Holt wrote in a note to clients, is being "cautiously optimistic," with companies navigating a modestly better but still uncertain future that depends on factors like overall world economic health and energy demand. Recovery may be more brisk in some sectors, like drilling-intensive shale fields that producers are flocking to exploit despite low prices, or the deepwater, which sees sustained activity.

Bill Herbert, an analyst with Simmons & Co., said that the service industry is in "purgatory," with activity holding steady at low levels.

"What we have seen so far is a low-calorie recovery in North America, and internationally we are treading water," Herbert said.

But there are some reasons for optimism. Halliburton reported that third-quarter revenue, which was still down from last year's levels, increased sequentially from the previous quarter for the first time this year. But that increase, driven by strength in the company's international operations, hasn't spurred executives to say the crisis is over.

David Lesar, chief executive of Halliburton, said that customers must see "compelling evidence of a recovery in hydrocarbon demand."

Operators "continue to reduce capital expenditures by deferring projects and exerting pressure on the oil service companies to improve their project economics," Lesar said during a conference call with investors.

In North America, the recent uptick in drilling was tenuous as producers faced weak demand for the fuel and robust supplies from so-called shale gas fields.

"We feel the current slight recovery in drilling to be fragile and not likely to significantly improve service activity and pricing until late 2010," Schlumberger's Gould said.

Weatherford International Ltd., meanwhile, said the pressure on service costs -- both domestically and internationally -- brought about by lower commodity prices subsided during the third quarter.

"We have seen no contractual instances of further decline in pricing," Bernard Duroc-Danner, chief executive of Weatherford said, adding that in some instances the company has seen modest price increases.  

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