Oil Service Companies Hit By Dry Gas Drilling Cuts : BHI, CRR, HAL, RES

Several oil services companies have reported a negative impact from the reduced spending on dry gas plays in the onshore United States. This will remain a continuing problem for many oil service companies in 2012.

Dry Gas Drilling Cuts
Carbo Ceramics (NYSE:CRR) manufactures and sells ceramic and resin coated sand proppant used during the hydraulic fracturing of a horizontal well. The company reported revenues of $158.1 million in the fourth quarter of 2011, up 32% from the same quarter of last year.

Although growth of this magnitude should be enough to satisfy the investor base, many were expecting higher sales, and the shares fell 20%. Also contributing to the decline, was commentary by the management of Carbo Ceramics at the time of the earnings release. The company said that a shift to liquids drilling during the fourth quarter of 2011 led to a 70% sequential drop in proppant sales in the Haynesville Shale. Sales of proppant also fell short due to logistical problems in the company's distribution system as a result of this shift in drilling activity.

RPC (NYSE:RES) also turned in strong growth in the fourth quarter of 2011, reporting double digit percentage increases in revenue and net income. Despite this growth, the management of RPC expects revenues in the first quarter of 2012 to decline sequentially, due to a shift from dry gas to liquids drilling in the U.S.

"We're going to be moving in the basins which typically aren't quite as service intensive," said Ben Palmer, the CFO of RPC. The company hopes that margins will be higher on these lower revenue service jobs.

Why Worry?
One company that doesn't seem worried about a cutback in dry gas drilling is Halliburton (NYSE:HAL), which reported earnings on Jan. 23, 2012. The company is one of the largest oil service operators active in North America, with $14.4 billion in revenues in 2011.

Halliburton also experienced the decline in drilling of dry gas plays in its service area in the fourth quarter of 2011. The company believes that the equipment leaving these areas will move to areas that produce crude oil and liquids, and help support demand in 2012.

"It is clear to us that the strength of liquids demand will provide a cushion to equipment coming out of the dry gas basins. We also believe that there will be a net overall increase in rig count in 2012," said David Lesar, CEO of Halliburton.

Baker Hughes (NYSE:BHI), which also has a dominant position in the onshore North American region, is relatively optimistic as well regarding activity in North America in 2012. The company disclosed its rig count outlook for 2012, and expects the overall rig count to be flat through the end of 2012, with any decline in dry gas drilling offset by an increase in liquids rich basins. Baker Hughes expects growth in the international rig count and estimates 11% growth here in 2012.

The Bottom Line
Although some operators are suffering the impact of a decline in dry gas drilling in North America, the largest oil service companies appear to be cushioned from this so far. Investors have to decide whether this will be the case for the balance of 2012 before buying into this stock price sell off.