Smaller U.S. oil services could look at emerging mkts for growth

BANGALORE Jan 25 (Reuters) - Smaller companies in the U.S. oil services sector will need to start looking internationally at possible acquisitions of their overseas counterparts to combat a slower North American market, fierce competition and higher overhead costs, analysts say.

Many small players will need to capitalize off growth in international markets, especially hot regions like the Middle East and Asia to escape the slowdown in local markets.

As sluggish regional natural gas prices forced companies to shut in production and stop drilling new wells that lead to the excess capacity in North America, smaller players have suffered.

Companies like RPC Inc (RES.N), Nabors (NBR.N) and Basic Energy Services (BAS.N) have reported declines in profit and analysts believe they need to pull off deals in order to grow.

"The major problem for the small companies is that they have very little international exposure, which is where the integrated, larger companies are experiencing most of their growth," said Curtis Trimble, an analyst at Natixis Bleichroeder.

Bigger companies such as Baker Hughes (BHI.N) and Halliburton (HAL.N), which were also hurt by the slowdown in the North American markets, continue to post profit growth helped by their activities internationally.

Wachovia's Brad Handler said companies with a greater international exposure will deliver more revenue and earnings growth.

On Wednesday, RPC Inc, which supplies oil field services and equipment including pressure pumping services, posted a 21.4 percent drop in its net profit.

"Increased competition, causing lower pricing for our services, and higher costs for labor and materials, all of which cannot be passed through to customers, continue to have a negative impact on our financial results," RPC's Chief Executive, Richard Hubbell, said in a statement.

Morgan Keegan analyst Mike Drickamer said the company could benefit from greater exposure to the more stable international markets, where there is less concern about the oversupply of equipment.

RPC's rivals have also struggled, with Nabors Industries Inc, a land drilling contractor reporting a 26 percent drop in third-quarter profits, while Basic Energy's profit fell 10 percent.

WHERE NEXT?

As the U.S. oil services companies look outwards for expansion, companies in the Middle East, Russia, Central and even South Asia could be a target.

"The Eastern Hemisphere has suffered from limited investment during the past two decades which argues for sustained spending growth in this market," said James West, an analyst with Lehman Brothers in a note to clients.

"The major oils and in particular the national oil companies all have aggressive drilling plans in the relatively early stages in these areas. We believe that the oil service companies with the best relationships and infrastructure in these regions will benefit disproportionately from this growth," he added.

The U.S. is largely a cyclical market and international acquisitions will diversify their exposure.

Small oil-field services companies are looking at emerging economies for acquisitions as these markets are poised for several years of growth, said Handler.

Handler views Russia and Middle East as attractive regions, but says some companies may also be looking towards Latin America as a good investment destination.

"There's lot of money flowing around and a lot of new assets out there that are highly desirable, also there are emerging companies in other parts of the world that would have an interest in these assets as well," said Jefferies & Co analyst Judson Bailey.

LOOKING AHEAD

Global spending on exploration and production by oil and natural gas companies is expected to rise more than 11 percent to $369 billion in 2008, fuelled by investment outside North America, according to a survey by Lehman Brothers.

Spending outside North America is seen increasing 16 percent in 2008 to $267 billion, according to the twice-yearly survey of 344 energy companies.

However, in the United States, exploration and production spending is seen rising a modest 3.5 percent to $81 billion due to uncertainty about natural gas prices, the survey said.

The trend could likely be reversed as companies could retire some of their older, less efficient equipment to cut the low equipment utilization and tackle excess capacity in the sector, said Natixis' Trimble.

But Wachovia's Handler is not optimistic of a turnaround in the United States, especially the shallow waters of Gulf of Mexico and said the gas market would not be robust enough to support it.

He would continue to look for a flattish U.S. oilfield services sector in 2008 given the uncertainties over gas prices and uncertainty over activity.

This increases the need for the smaller U.S. oil services companies to expand their global footprint, if they want to become profitable and want to realise the benefits of the record high oil prices. (Editing by Jarshad Kakkrakandy)