Drilling in the US: A Comeback With Implications

(MoneyWatch)  (Note: This is a post submitted by BNET member Steve Rassenfoss, whose bio appears below. To submit your own post, click here.)
The headlines on the earnings reports for oil-well service companies confirm the obvious -- really high oil and gas prices boost profits -- but there was a subplot there that could matter for a lot of companies.

Drilling in the U.S. is looking like a big moneymaker for these companies again. Domestic rig counts have been rising for years. But the bottom lines of oil-well service companies haven't benefited the way they have in other locations with less competition, which allowed hefty price increase.

In the earnings reports released since Friday, the reports from Schlumberger, Halliburton, Baker Hughes, BJ Services and Weatherford all noted that profits from North America were looking up. Schlumberger said it entered the year with doubts about North America, but "now uncertainty around the direction of natural gas drilling in North America has been removed."

During Weatherford's conference call, CEO Bernard Duroc-Danner said, "No doubt, at this time, we expect a robust 2009 in the United States," in the drilling business. BJ Services raised its expected earnings for its next quarter to 8-14 percent more than the analyst's average from Thompson Financial after "U.S. drilling activity exceeded expectations."

Those paying electric bills know one reason for all the happy talk -- natural gas has remained high, selling for more than $10 per thousand cubic feet. That encourages more drilling, but it's the kind of wells getting drilled that is the big news here.

After years of accumulating acreage in natural gas shale plays, exploration and production companies need to deliver the promised production. "Everybody's been talking about their plays," said Ben Dell, an oil services analyst at Sanford C. Bernstein & Co. in New York quoted by Bloomberg. "The reality is, now they have to deliver it, and that means that money gets transferred down the food chain."

Analysts said that good news for the service companies because gas in this hard-to-produce rock requires lots of their premium products -?€" specialized drilling equipment able to drill sideways, pressure pumping to break up the rock and specially designed chemicals to induce production. The list goes on and on. But the upshot is: they're selling lots of high-priced products and services.

Which geeks up analysts like Kurt Hallead, who covers oil and gas at RBC Capital Markets in Austin, Texas: "The fourth quarter's going to be a fundamental blowout for the oilfield- services industries."

What's not so talked about is whether this could be an image changing moment for the exploration companies shelling out the cash. While the geologic risk isn't so great in shale and the production methods are improving, it's still a fairly high upfront investment in fields that can produce steadily but relatively slowly.

Stephen Rassenfoss is a business writer who lives in Houston. He learned about energy working at the Houston Chronicle as an assistant business editor.