Oil Service Operators Speak on the North American Onshore

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The North American drilling cycle is an important determinant to earnings in the energy sector and the level and trend of this cycle should be monitored by investors that are active in this sector.  One method of keeping current is through a review of earnings releases and conference calls as oil service operators typically make extensive commentary on business trends in their respective service areas.

Soft Demand

Helmerich & Payne (NYSE: HP) reported income from continuing operations of $150 million in the third quarter of fiscal 2012, a record for the company.  Despite this achievement, management conceded that the sharp decline in oil prices has impacted business and led to a “softening” of demand for land rigs and other oil services.  Helmerich & Payne tried spin control on this announcement and believes that exploration and production operators will focus on improving drilling efficiencies and lead them towards the use of the company’s more advanced drilling rigs.

Pricing Pressure

Basic Energy Services (NYSE: BAS) reported a decline in pricing for the hydraulic fracturing services that the company offers in North America as well as the deferment of completion activity by some of its customers until later in the year.  The company said that this behavior was motivated by weakening prices for natural gas liquids, along with general concern on economic growth in the United States and other areas.

Key Energy Services (NYSE: KEG) conceded that demand for its services in dry gas plays continued to weaken, an obvious statement of fact known by those with even a superficial knowledge of conditions in these areas. The company did note that it saw this weak demand trend start to stabilize during the second quarter of 2012.  Key Energy Services also saw encouraging demand from customers active in developing oil plays but noted a slowdown in demand growth here due to lower oil prices and extra oil services capacity migrating from dry gas areas.

Patterson-UTI Energy (NASDAQ: PTEN) reported “difficult market conditions” for its pressure pumping services during the quarter as its customers became increasingly cautious on making capital commitments due to weakening commodity prices.  Patterson-UTI Energy plans to deal with the environment by focusing on cost reductions throughout the company’s operations. 

Patterson-UTI Energy ordered new pressure pumping equipment in 2011 and expects to receive this equipment later in 2012.  The company will not increase its active fleet and plans to stack enough equipment to offset this new capacity.

C&J Energy Services (NYSE: CJES) has been aggressively expanding its hydraulic fracturing fleet and increased horsepower capacity by approximately 15% in the second quarter of 2012.  The company experienced lower utilization and pricing for this equipment as competitors moved capacity from dry gas basins into its service areas.  C&J Energy Services is taking a similar approach to Helmerich & Payne and hopes to market its fleet to customers by emphasizing the cost savings realized through the efficiency of the company’s new build fleets.

Misplaced Optimism  

Oil service companies were optimistic that oil and natural gas liquids directed activity would carry the industry through 2012 and offset the brutal conditions in dry gas basins. This positive outlook turned out to be misplaced as pricing pressure for select oil service lines and a slowdown in growth has hit these basins as well.

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