Halliburton Co (HAL.N) posted a quarterly profit on Monday that topped Wall Street forecasts, helped by increased activity outside North America, where it expected margins would start recovering by early next year.
Shares of Halliburton, the world's second-largest oilfield services company behind Schlumberger (SLB.N), rose 2.5 percent despite a decline in oil prices weighing down the sector .OSX.
Halliburton had warned last month that a shortage of guar beans in India would depress margins at its pressure pumping operations in shale fields, a key profit driver for the company.
Guar, which is also used to make sauces and ice cream, is a key part of the hydraulic fracturing fluids that have been in high demand due to a boom in U.S. drilling and well development.
Chief Executive David Lesar said on a conference call that the company's decision to stockpile guar over the quarter meant it would be absorbing the higher guar costs for the rest of the year, even though prices were now declining. He referred to the elevated guar costs as like moving a "pig through the python."
"With 20/20 hindsight, simply put, we made the wrong decision. The result is we bought too much guar too early and paid too much for it," Lesar said. "I want to be clear with you -- I supported and agreed with the decision to secure the strategic guar reserve, and I will take the heat for it."
Halliburton has said previously that the guar system can account for as much as 30 percent of the overall fracking price.
The shortage hurt earnings at its industry-leading fracking business and pulled profits slightly below the year-ago level. That compared with the results from Schlumberger and Baker Hughes Inc (BHI.N), which both posted higher profits on Friday, also lifted by strength outside North America.
COULD HAVE BEEN WORSE
Still, Halliburton's North American results were not as weak as many company watchers had feared.
"North American margin degradation was less than expected," Barclays analyst James West said in a note to investors. At its current share price "we believe Halliburton represents compelling value."
Halliburton has benefited from its leading position in North America in recent years as oil and gas producers poured money into developing shale fields, although its rising costs and a steep drop in natural gas prices have crimped profits this year.
Net profit slipped to $737 million, or 79 cents per share, from $739 million, or 80 cents per share, a year before. Profit from continuing operations was 80 cents per share, beating the 75 cents that analysts on average had forecast, according to Thomson Reuters I/B/E/S.
Revenue rose 22 percent to $7.2 billion, well above the $6.96 billion analysts had predicted.
A drop of the nearly 5 percentage points in North American margins was partially offset by increased profitability in other markets, particularly Europe, Africa and Russia and other former Soviet states. Guar accounted for about two-thirds of the margin depression in North America, Halliburton said.
Halliburton earned more than three-quarters of its 2011 income in North America, compared with about 40 percent for Schlumberger.
See graphic: link.reuters.com/gyr59s
"North America is still going to be a good market for Halliburton and international will be where the growth comes from," said Scott Gruber, an analyst with Sanford Bernstein in New York, though he added that he preferred Schlumberger shares.
Overall, Halliburton's plans are unchanged. It is targeting $3.6 billion to $3.8 billion in capital expenditure this year -- tightening the range from $3.5 billion to $4 billion previously.
Halliburton's shares, down 11 percent in 2012 through Friday, gained 2.5 percent to $31.58 in morning trading. Schlumberger was down 1.2 percent, retreating from its two-month high on Friday.
(Reporting by Matt Daily in New York, Swetha Gopinath in Bangalore and Braden Reddall in San Francisco; Editing by Maureen Bavdek)