Friday, June 24, 2011

Fracking gold rush lifts Halliburton as well backlog swells

Two Halliburton Co. employees work at a natural gas drilling site near Rifle, Colo. Bloomberg file

By DAVID WETHE & MIKE LEE Bloomberg News

Halliburton Co. and Schlumberger Ltd. may have the power to charge higher prices for their oilfield services through 2012 thanks to a backlog of unfinished oil and natural gas wells that tripled in the past year.

The number of onshore wells in the U.S. and Canada waiting in line for the workers and equipment needed to complete them for production has risen to 3,500 from 1,145 in the second quarter of 2010, according to Houston-based Halliburton. Producers are seeing delays as long as six months.

The North American onshore drilling boom, driven by companies rushing to exploit shale-rock formations, sent demand skyrocketing for oilfield services such as hydraulic fracturing that cracks the rock to release gas and oil. Rigs drilling on land in the U.S. increased by 20 percent in the past year to 1,833 as of last week, according to Baker Hughes Inc. data.

Servicers are "like the people that sold the picks and shovels during the gold rush in California," said Allen Brooks, managing director with Houston-based investment bank Parks Paton Hoepfl & Brown.

The swelling backlog of wells to be completed gave oilfield services companies the power to raise prices more than 16 percent last year. It may accelerate consolidation in the industry as companies expand to meet demand, said Brian Uhlmer, an analyst at Global Hunter Securities in Houston.

The Philadelphia Oil Service Sector Index, a group of 15 names, has climbed 46 percent over the past year, while the Standard & Poor's 500 index is up 17 percent, and the S&P's explorers and producers index has risen 24 percent.

Halliburton, Schlumberger and Baker Hughes, the largest providers of hydraulic fracturing services in the U.S. with more than 1 million horsepower each in pressure pumping equipment, are expected to expand earnings 46 percent this year, according to analyst estimates compiled by Bloomberg.

New technology allows rigs to punch holes in the ground faster, while advanced production techniques mean it takes longer to finish the well, including multiple rounds of hydraulic fracturing that injects a mixture of water, sand and chemicals into the well to break open the rock so oil and gas can flow.

Demand for so-called fracking may continue to exceed supply into 2013, Uhlmer said.

"Right now our customers can't get enough of us," Mark McCollum, chief financial officer of Halliburton, told analysts and investors May 24. "There's really been no discussions on any customers' point of slowing this process down for the foreseeable future."

Explorers and producers are expected to spend $122 billion in the U.S. this year, James Crandell and Omar Nokta, analysts at Dahlman Rose & Co., wrote in a June 7 note to investors.

Kurt Hallead, an analyst at RBC Capital Markets, said in December that fracking prices that rose 16 percent in the first half of 2010 would continue to climb.

Whiting Petroleum Corp., a Denver-based oil producer, has seen a 10 percent increase in total well costs in North Dakota's Bakken Shale in the past year, said John Kelso, director of investor relations. The biggest driver of the increase is a 20 percent to 30 percent jump in the cost of fracking, he said.

Revenue from pressure pumping should surpass offshore drilling this year to become the largest segment in the equipment and service industry, according to a May 31 note to investors from Global Hunter, citing Spears & Associates.

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