Story by Bloomberg

Halliburton Co. (HAL) Chief Executive Officer Dave Lesar is joining the chorus of oil executives who say they aren’t worried about falling oil prices, and expect them to climb next year.

“Despite what people are thinking, demand is creeping up, albeit at a lower rate than it has been,” he said. The downward pressure on prices is mostly due to an oversupply, and Lesar said that will quickly prove self-correcting, especially when it comes to U.S. shale production.

Unlike with conventional oil, shale wells peter out quickly and companies depend on constant new drilling to maintain production levels. This also makes shale more responsive to price movements. Lower prices will discourage new drilling, quickly removing the glut in crude supplies, Lesar said.

As the the world’s biggest supplier of fracking services, Halliburton has perhaps the best perspective on what’s driving the U.S. shale boom.

In an interview at the company’s Houston headquarters, Lesar also said the supply-demand imbalance is temporary, and that prices are likely to remain between $80 and $100 a barrel.

The breakneck pace of shale drilling in recent years has pushed oil output to 31-year highs just as forecasts for global demand were cut. U.S. crude prices plunged more than 25 percent since June to hover around $80 a barrel, and the industry is poised for them to drop even more.

Falling prices may be detrimental to Halliburton because oil producers would have less cash for the equipment and hydraulic fracturing services Lesar’s company provides.

Three Necessities

Lesar sees North America as its most promising regionfor deploying its new fracking gear. To make shale drilling economic, a country needs three things: good rock soaked in oil and natural gas, ample infrastructure such as pipelines to carry the petroleum to market and a profitable price.

For now, the U.S. is the only market with all three, Lesar said. “The reality is I can put it to work in the U.S. at a higher profit today, so why would I build and send to China or Saudi Arabia or Australia?”

More than any of its peers, Halliburton is tied to the ups and downs of North America, where it generates about half its sales. More than 80 cents out of every dollar of profit in the region comes from its fracking division.

Halliburton would take the biggest hit out of all the major oil-services companies if North America drilling slows, said Rob Desai, an analyst at Edward Jones in St. Louis. “That’s the unfortunate part of the way they’re tilted,” he said.

Production Budgets

Oil companies are already reevaluating their plans. Exploration and production budgets for North America are expected to stay flat next year, Jim Crandell, an analyst at Cowen & Co., wrote in an Oct. 20 note to investors. Spending was previously expected to climb 10 percent.

Halliburton posted a 70 percent jump in third-quarter net income from a year earlier. Analysts expectthat to slow, partly due to the usual end-of-year industry slowdown, to a 30 percent increase for the current period.

Lesar, a 61-year-old accountant, was groomed by former Vice President Dick Cheney to take over as CEO of Halliburton, and the company’s shares have doubled since he was appointed in August 2000.

Shale Gas

To get there, Halliburton had to get through a period of rising competition from smaller companies that piled into shale when it was still all about gas. That led to a glut in equipment and drove down the prices Halliburton could charge. Lesar doesn’t see that repeating in shale oil fields, where wells draw from dense rock and dry out faster than conventional production.

Shale oil requires constant drilling to maintain production, and it’s harder than extracting gas. It requires a deeper understanding of geology, better targeting ability and improved technology that smaller rivals lack. The priority now is making oil drilling as efficient as possible.

“What drew people into the last upcycle was gas drilling,” Lesar said. “The science and the technology in oil fracking are way harder. That, by its definition, really limits the playing field to a much smaller group of companies.”

Legal Notice