Why some oilfield service companies are well positioned for growth

Part 6

Positive signals for oilfield activity in Eastern Hemisphere

Strong activity in the Eastern Hemisphere

Oilfield services companies reported strong levels of activity across all of Asia, Russia, Australia, Sub-Saharan Africa, and Saudi Arabia. Companies reported stronger earnings in these segments due to increased activity—though they commented that there weren’t many opportunities to improve pricing and that higher earnings would come from increased utilization and efficiency. The pursuit of unconventional gas in Saudi Arabia and Oman is one of the factors helping to boost activity. Overall, these are strong positive signals for oilfield service companies with assets in those regions.

2013.08.30 - International Rig CountEnlarge Graph

Quotes from 2Q13 conference calls

Halliburton (HAL)

“We expect our Middle East/Asia region to be the highest growth one that we have led by Saudi Arabia, Iraq and all of Asia.”

“The Eastern Hemisphere had solid sequential improvement compared to the first quarter of 2013, with revenue growth of 11% and operating income growth of 23%. The improvement was led by seasonal recoveries in Norway and Russia, along with improved activity levels in Angola and across all of Asia.”

“In the Middle East/Asia region, compared to the first quarter, revenue and operating income increased 12% and 17%, respectively. The growth was driven by higher stimulation, wireline and fluids activity in Malaysia, increased drilling and stimulation activity in China, and improved profitability in Iraq. The Middle East/Asia is a high growth region for us, and Malaysia is a great example, where our revenue grew 40% year-over-year and profit more than doubled driven by our strategic offshore wins.”

In response to a question about which regions drove increased margin guidance for the Eastern Hemisphere, the company explained, ”A lot of that still is on the back of what we’ve seen in Asia. I mean, we’ve really come on strong in Asia. We’ve seen the kind of growth throughout the region and have no reason to believe that necessarily that abates. Key contract wins last year; we’re seeing those get started and grow into their—grow into the types of margins we were expecting out of those and then we follow those up with a few more wins.”

“For the year, we still fully expect Eastern Hemisphere margins to average in the upper teens, with year-over-year revenue growth in the mid-teens. With pricing improvement opportunities in the Eastern Hemisphere continuing to be somewhat illusive, our current operating bias is toward improving our utilization and efficiency as we address the increase spend from our customers.”

“We’ve not seen a pricing inflection point even with increased spending because customers are really pretty much taking us slow and steady in terms of their increase and typically slow and steady doesn’t lend itself to a major pricing inflection point, because all of a sudden a lot of capacity is stripped out of the market.”

Schlumberger (SLB)

“Asia also contributed strongly to the area results by delivering record revenue in four geo markets, driven by robust market share and new technology sales.”

“China led the Asia growth on a rebound from seasonally low land drilling and stimulation activity in the previous quarter and also helped by an upswing in offshore activity.”

“We also posted very strong growth in Australia, driven by continued growth in unconventional activity on land, as well as offshore and deepwater activity in the Northwest and in Papua New Guinea.”

“We said that the main growth markets would be Sub-Saharan Africa, Russia, Middle East, in particular, Saudi and Iraq, China and Australia, those were the five main drivers. So basically ECA and MEA were the main drivers of growth in international market.”

Baker Hughes (BHI)

“In our Eastern Hemisphere segments, we delivered revenue growth of $189 million, or 11% sequentially, with 30% incremental operating profit. Our Eastern Hemisphere operating profit margin was 13.7%, up 170 basis points sequentially. Among our Eastern Hemisphere segments, Europe/Africa/Russia Caspian experienced the most significant improvement in revenue, operating profit, and operating profit margin.”

“In Norway, for example we have ramped up one of the largest integrated drilling service contracts in the history of our industry, this coupled with strong activity in Russia, Nigeria and the U.K. grew our Europe/Africa/Russia Caspian segment by more than 13% over the previous quarter with incremental margins in excess of 50%.”

“Looking at our international margins, we expect that our Europe/Africa/Russia Caspian segment margins should continue to increase in the second half, driven by activity improvements in newly won share in the U.K., Nigeria, Sub-Sahara and Russia. Our Middle East/Asia Pacific segment margins should rise during the second half of the year also as unconventional gas activity in Saudi Arabia increases and as profitability increases in Iraq.”

“Looking internationally, the rig count is anticipated to continue the recent growth trends in the second half of the year, yielding an average 2013 rig count of 1,360 rigs with increases in every region. Excluding Iraq, this represents 7% increase in the annual international rig count.”

“Across the Middle East, development of the unconventionals is becoming a growing market driver, Saudi Arabia and Oman are both actively targeting shale gas and tight gas production.”

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