Oil services firms beat expectations, tough times loom

By Karolin Schaps and Abhiram Nandakumar

LONDON/BANGALORE (Reuters) - Oil and gas service companies have fared better than expected in the first half of the year despite a weak market, thanks to deep-pocketed Middle Eastern customers and stringent cost cuts.

However, they warn the second half of the year will likely be much harder as oil companies cut spending even further after a near 30 percent fall in oil prices since the start of July. Prices have more than halved since peaks hit in summer last year.

Norway's Seadrill (NYSE: SDRL), which expects to make $500 million of cash savings this year, and Britain's Hunting (NYSE: HTG) beat analysts' expectations, as did rivals such as Technip , Subsea 7 (NASDAQ: SUBC) or Wood Group (NYSE: WG).

Many oil services companies - which do everything from surveying to drilling wells - relied on business in the Middle East to counter balance a drop in activity in costly areas such as the North Sea or the Gulf of Mexico.

Oil operations in the Middle East are managed by cash-rich governments which in turn rely on income from the sector. Oil production costs in the region are some of the lowest in the world.

"The Middle East, which fortunately is where we geographically are located, is probably one of the least affected areas," said James Moffat, chief executive of Dubai-based oil and gas equipment maker Lamprell.

Amec Foster Wheeler (NYSE: AMFW), created last year by Amec's $3 billion takeover of Foster Wheeler, saw revenue in its division including the Middle East grow 6 percent in the first half.

Wood Group (NYSE: WG) made $40 million worth of cost cuts in the first half, especially through contractor rate reductions, while Petrofac saved $80 million over the same period.

But with oil companies already drastically cutting back on investments - around $200 billion worth of projects are on hold or scrapped - and likely to cut further due to a persistent crude oil glut and weak prices, the overall outlook is bleak.

The FTSE All Share Oil Equipment and Services index <.FTASX0570> has fallen 19 percent in the last three months.

"While everyone is doing their best to cope, it still makes for uncomfortable viewing," analysts at Investec bank said. "A 'lower-for-longer' scenario is beginning to be baked into market expectations."

Echoing peers, Scotland-based Weir Group said it expects its second-half margins to be slightly below first-half levels, reflecting the full impact of pricing pressure.

Customers' cost cuts could also accelerate consolidation in the services sector as companies scramble to offer a broader range of products to offset lower demand for traditional offerings.

Schlumberger Ltd (NYSE: SLB), the world's largest oilfield services firm, said on Wednesday it had made a $14.8 billion bid for equipment maker Cameron International.

In November last year, Halliburton and Baker Hughes, Schlumberger's rivals, agreed to a $35 billion tie-up.

Some are also eyeing opportunities in Iran, which reached a deal in July to curb its nuclear program in exchange for the eventual removal of sanctions.

"We have a good understanding with Iran about what they would like to do first. The day the sanctions are lifted that's when we can start," said Samir Brikho, chief executive of Amec Foster Wheeler, which has worked in Iran.

(Reporting by Karolin Schaps; editing by Susan Thomas)

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