After riding high in 2010 and 2011 on drilling demand created by the North American shale boom and some recovery in the U.S. Gulf of Mexico following the Macondo incident, the major oil field service companies saw their mid-year margins in North America shrink in 2012, while their costs rose. However, margins from activity occurring outside the U.S. are growing for companies in this sector, and rig counts outside North America are projected to be up eight percent in 2012, according to a recent report from IHS (NYSE: IHS), the leading global source of information and analytics. The four companies covered in the report are Baker Hughes , Halliburton, Schlumberger and Weatherford.
According to John Parry, author of the IHS Herold Oilfield Service Company Peer Group Analysis, these companies saw their margins decrease because they had significantly higher costs for guar gum (a component used in fracturing fluids), they faced pricing pressures for their hydraulic fracturing services, and at the same time, had to adjust to the costs and impacts associated with the ongoing relocations of equipment and personnel from gas to liquids-rich basins.
For these companies, a look at aggregate operating margins for the first six months of 2012, as compared to the same period in 2011, tells the tale of eroding margins in North America while improving outside of North America. Although six-month results for these four companies showed $24 billion in North American revenue, a 24% year-over-year jump, operating income failed to keep pace, rising just 8.3% to about $4.8 billion.
Outside of North America, aggregate revenue rose 18% to $28.3 billion, but operating income rose a more impressive 42%, reaching $4.6 billion. Measuring operating income as a percent of revenue further demonstrated the shift, as aggregate North American margins eroded to 19.9% for the 2012 six-month period, which was down from 22.8% in the same 2011 period.
At the same time, operating margins outside of North America for the 2012 period advanced to 16.3% of revenue from 13.5% one year earlier. The squeeze on the North America contribution is further evidenced by its reduction to 50.8% of total operating income in the first half of 2012, down from 57.6% in 2011.
Also contributing to North American margin pressure is the fact that the U.S. natural gas rig count declined 18% in the second quarter, and is down 43% from its high in October