There is a palpable sense among those who track such things that oilfield service companies will have a better 2013 than 2012. And considering that the big three – Halliburton, Schlumberger and Baker Hughes – all had disappointing fourth quarter earnings’ reports, this news couldn’t come at a better time.
Geophysical companies represent an important part of the industry’s overall picture, and overall, the state of the their part of the industry was a bit mixed at the start of the year, according to various analysts.
Challenges that the industry faced last year, according to various reports, included:
- A bearish business environment caused by market prices.
- A very bullish (and perhaps oversupplied) marketplace for hydraulic fracturing services.
- The high cost of various materials.
Analysts are expecting a rebound in 2013, however, thanks to offshore operations, international growth during 2012, and the simple fact that some activity will be necessary for operators to retain possession of potentially valuable shale targets.
More signs of improvement can be found in the price of stock for the big three companies; in early February all were up – in the case of Halliburton, up about 16 percent.
“I am very proud to say that our company delivered industry-leading revenue growth in 2012, resulting in a record year,” commented Dave Lesar, chairman, president and chief executive officer of Halliburton.
Lesar sees even more light at the end of 2013 – for his company as well as his peers in the oil services industry.
The reasons, according to analysts, are three-fold:
- Many companies may have pulled back too much in 2012, and an adjustment is due.
- Rigs are becoming more efficient, allowing more wells to come online that need to be fracced and completed, padding the profits of these large oilfield-services companies.
- Rigs are becoming cheaper.
Specifically, well costs are falling (some analysts say about 5 percent and predict futures savings through the end of the year), as is the cost of fracturing, which is down between 15-30 percent.
These two factors will add to an already healthy bottom line – and more drilling.
“From a revenue perspective,” Lesar said in his company’s earning report, “we set new records this year in all of our regions and both of our divisions.”
That translated to revenue of $7.3 billion in the fourth quarter for his company, which was up 3 percent sequentially and represented highest quarterly revenue in company history.
“All three of our international regions and eight of our 12 product lines set new revenue records,” he said.
International’s Impact
A closer look at Halliburton’s report indicates the importance of the international arena for geophysical companies.
According to its Q4 earnings press release, the hot spots in 2013, will continue to be:
♦ Latin America – Revenue was up 14 percent sequentially, despite a 2 percent drop in the rig count, and adjusted operating income increased 25 percent sequentially.
Increased drilling fluids service activity, along with higher software sales in Mexico and Colombia, led the growth for the region.
♦ Eastern Hemisphere – Revenue grew 11 percent sequentially, and operating income increased 35 percent sequentially, driven by year-end sales of completion tools, software and other equipment. The company expects activity levels to grow in 2013.
♦ Middle East/Asia – Revenue and operating income increased 14 percent and 46 percent, respectively. The growth was driven by higher year-end software, equipment and completion tools sales, as well as increased service activity in Saudi Arabia and Australia.
♦ Europe/Africa/CIS – Revenue and operating income increased 8 percent and 23 percent, respectively, compared to the prior quarter. The was due in part to:
- Seasonally higher year-end completion tool sales in Angola and the North Sea.
- Greater demand for drilling services in the North Sea and Russia.
- Increased service activity in East Africa.
Unfortunately, that excitement was balanced by North America reports, where revenue was down 5 percent for the company compared to the previous quarter.
Operating income was down 22 percent compared to adjusted third quarter results, driven mainly by an unusually high post-Thanksgiving decline in activity levels with key customers and continued pricing pressure around hydraulic fracturing contracts.
“Our North America margins,” he said, “are also temporarily being negatively impacted by the upfront roll out costs of our ‘Frac of the Future’ initiative, by our commitment to our customers to remain active in the North America natural gas basins at lower margins and by our decision to stack equipment during the fourth quarter.”
With these frac costs decreasing, as well as other factors, Lester sees things improving.
“In 2013, we anticipate the North America rig count will improve from fourth quarter levels,” he said. “We are focused on rebuilding margins as we … reap the benefits of our strategic initiatives, and look at all of our costs.”