Tuesday, July 21, 2009

Pricing in the Swoon

Monday's big news was Halliburton’s earnings report. The company reported earnings that were down from last year (no surprise) but were buoyed by profits from Asia and the Middle East. Halliburton CEO David Lesser’s comments on natural gas prices were widely reported. He said, “we believe it is unlikely that there will be a meaningful recovery in natural gas prices and, consequently, drilling activity for the remainder of the year.”

Total natural gas in storage as of July 10 was 2.9 trillion cubic feet, 18.7% above the five-year average and 25.6% above last year's level. On top of Halliburton’s CEO’s comments, it looks like expected pleasant weather across much of the nation for the next couple of weeks will depress the need for A/C and keep a damper on gas prices.

At the same time, CEO Lesser said that the gas industry’s long term fundamentals are bright. Halliburton is a provider of pressure pumping, a key part of hydraulic fracturing, which enables the recovery of gas from shale formations. Approximately 45% of Halliburton’s 2008 revenue (not profit, mind you) came from North America. He also noted that the recent depressed commodity prices have impacted pricing from oil field service companies, but he believes that things are "probably close to the bottom in terms of pricing degradation."

Wishful thinking? Probably. On one hand you’ve got Halliburton saying that prices aren’t going to decrease anymore, and on the other you’ve got the producers saying that prices still need to keep going down for drilling to be profitable (read: and for companies like Halliburton to continue to get jobs). Ultimately, the customer hires Halliburton (or Schlumberger) to do the work, and the customer is looking at multiple bids. Until the rig count starts going up significantly, I think pricing power will continue to belong to the customer.

As I see it, that’s good news for the Haynesville Shale. I’ll bet that Halliburton, Schlumberger and the other oil field service giants are focused on the Haynesville Play (and other North American shale formations) with a white hot glare. That’s where the action is and they want a piece of it. If they have to lower their prices to get in, they will.

Schlumberger reports Q2 earnings at the end of this week - I can't wait to hear what they say.

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