When Schlumberger Limited (SLB -2.25%) reported earnings last week, it did so with a warning. CEO Paal Kibsgaard told its investors "the main challenge in the North America land market is still pricing." That's bad news for some of Schlumberger's more North American-focused peers like Halliburton Company (HAL -0.92%) and Baker Hughes Incorporated (BHI). But bad news for service companies is actually really good news for their customers and for investors in those stocks. Here's why.
Good news for producers
Intense competition for work in North American shale gas and oil fields by Halliburton, Baker Hughes, and others has really eroded oil-field-service profits. Further, drilling days are speeding up as more companies move to multi-well pads. This is shaving hundreds of thousands of dollars off the cost of each well.
On top of that, weak gas prices are causing many producers to cut back on growth, with many of the industry's most aggressive growers no longer piling on debt or selling assets to fund new wells. That perfect storm is causing an oversupply of oil-field services, which drillers are using to negotiate reduced rates for new wells. That's creating quite a challenge for service companies, which is why Schlumberger, for example, continues to focus most of its attention outside of North America.
To get an idea how falling costs are effecting producers we can take a look at a company like Halcon Resources Corp (HK), for example. The company's move to multi-well pad drilling cut $1.3 million and 25 days off of the cost of drilling four wells. What's interesting is that Halcon Resources is saving thousands of dollars per well on everything from cleaning out the brine tanks to not losing money on damaged pipes that no longer need to be moved from site to site. By striping away those costs it is cutting the revenue and crimping the profits of oil-field-service companies.
Bad news for Halliburton and Baker Hughes
While falling well costs are good news for producers, this isn't exactly great news for Halliburton or Baker Hughes. Both companies are much more levered to North America than Schlumberger. In fact, Schlumberger's strength overseas was why it was able to report a better-than-expected fourth-quarter profit last week. Meanwhile, Baker Hughes has already warned that its quarterly profit would be below estimates. Challenges in North America, when combined with its issues in Iraq put a dent in its bottom line.
The oil-field-service business in North America continues to look weak despite the drilling boom. That's certainly a headwind for both Baker Hughes and Halliburton. But this is really good news for producers as it means that well costs should continue to head lower, enabling them to drill more wells with less money.