(Reuters) - Oilfield service companies Halliburton Co (HAL.N) and Baker Hughes Inc BHI.N said they expect an improvement in North American margins, driven by a modest pickup in onshore activity and strong deepwater drilling in the Gulf of Mexico.
Halliburton and Baker Hughes, No. 2 and No. 3 in the industry, have been expanding outside the United States and Canada, where excess capacity and a drop in the number of rigs drilling for natural gas has eaten into margins.
Strong activity in international markets, particularly the Middle East and Africa, helped both companies report stronger-than-expected fourth-quarter earnings on Tuesday.
Baker Hughes shares rose about 2 percent in morning trade. Shares of Halliburton, which initially rose on the results, fell 3 percent after the company said in a conference call that conditions would remain tough in Latin America.
Halliburton said it was targeting an improvement of 200 basis points in North American margins in 2014, while Baker Hughes said it expected margins in the region to recover by at least 105 basis points in the first quarter.
Halliburton, which expects 2014 revenue in North America to increase by a mid-single-digit in percentage terms, said the average U.S. land rig count was likely to increase modestly this year.
Baker Hughes, which publishes a closely watched tally of active rigs, said it expected the U.S. onshore rig count to be essentially flat this year, but added that the well count would rise by 5 percent due to improved drilling efficiencies.
Oilfield service companies are able to secure more business despite no growth in rig count as greater efficiency allows clients to drill more wells with a single rig.
Baker Hughes said increased profitability in North America would offset a seasonal decline in its international and industrial businesses in the first quarter.
The company said it expected first-quarter earnings to rise “slightly” from fourth-quarter adjusted earnings, excluding the impact of disruptions in Iraq.
Baker Hughes temporarily suspended operations in southern Iraq in November, following protests over an alleged religious insult by a security adviser working in the area for competitor Schlumberger Ltd (SLB.N), whose operations were also disrupted.
Halliburton said it expected a seasonal decline in first-quarter revenue in Latin America and that margins there would be more “severe than normal” due to higher costs in Brazil and reduced land drilling in Mexico.
Falling output from older offshore oil fields in Brazil along with delays in bringing on new areas is weighing on drilling activity in the country.
Halliburton expects margins for the Latin American region, which accounted for 13 percent of operating income in the fourth quarter, to stay in the upper single digits until activity begins to recover in the back half of the year.
Fourth-quarter operating income from Latin America fell 21 percent, while revenue was flat at $1 billion.
“We believe that 2014 will be a very challenging year for Latin America,” Chief Operating Officer Jeffrey Miller said on a conference call with analysts.
Both Halliburton and Baker Hughes received nearly half of their revenue from outside North America in the fourth quarter.
Halliburton forecast double-digit growth in earnings per share in 2014, citing strong international demand.
“Halliburton’s bullish outlook for 2014 should ease some concerns about the outlook for global E&P (exploration and production) spending in 2014,” Barclays analysts said in a note to clients.
Barclays expects oil and gas companies to spend about $723 billion on exploration and production this year, an increase of 6.1 percent from 2013, according to a report released last month.
Baker Hughes said it expected the international rig count to grow by 10 percent this year.
Baker Hughes said its revenue from Middle East and Asia Pacific jumped 27 percent in the quarter, while Halliburton’s revenue from the same regions climbed 13 percent.
Most of their gains in the Middle East are coming from Saudi Arabia, the world’s largest oil exporter, which is lining up dozens of rigs this year to make up for supply disruptions in other countries, including Iran, Libya, Nigeria and Yemen.
Market leader Schlumberger, which gets almost 70 percent of its revenue from outside North America, posted a better-than-expected profit on Friday thanks to robust drilling activity in Saudi Arabia and the United Arab Emirates.
Baker Hughes said revenue from its operations in Europe, Africa, Russia and the Caspian region combined rose 10 percent in the fourth quarter. Halliburton’s revenue from the same areas rose 15 percent.
Halliburton’s income from continuing operations rose 31 percent to $770 million, or 90 cents per share, in the fourth quarter. Revenue rose 5 percent to $7.64 billion.
Adjusted income from continuing operations was 93 cents per share. On that basis, analysts on average had expected earnings of 89 cents on revenue of $7.55 billion, according to Thomson Reuters I/B/E/S.
Net income attributable to Baker Hughes rose 16 percent to $248 million, or 56 cents per share, in the quarter. Revenue rose 10 percent to $5.86 billion.
Excluding one-time items, Baker Hughes earned 62 cents per share. Analysts on average had expected earnings of 61 cents on revenue of $5.67 billion.
Halliburton shares have risen 35 percent in the past year, while Baker Hughes shares have risen 27 percent. The broader Philadelphia oil service index .OSX has risen 17 percent.
Halliburton shares were trading at $49.21 in midday trading on the New York Stock Exchange. Baker Hughes shares were trading at $55.29.
Reporting by Garima Goel and Swetha Gopinath in Bangalore; Editing by Don Sebastian and Ted Kerr