General service and supply companies racked up a year-over-year increase in operating income for the second quarter and first half of 2003. Meanwhile, their offshore-focused and geophysical-focused peers saw their income dive from the same period last year. For the second quarter, the general firms' operating income increased 179.03%, while offshore companies' income fell 47.07% and geophysical companies' decreased 67.93%. For the first half, the general firms tallied a 39.52% rise in operating income, offshore companies took a 32.73% dive and geophysical firms' income fell 42.89%. The general firms' 2003 operating income percentage increase was made steeper by Halliburton's troubled first-half 2002 numbers. The oil services giant took a $330-million charge in the second quarter of last year due to asbestos-related issues, hampering the year-ago numbers for the entire group. Excluding Halliburton's numbers, the group still racked up an increase for the quarter-7.37%. But income for the half was down 3.26%. Revenues were up year-over-year for all groups in the quarter and the half. In general, Wall Street deemed the quarter a success, as earnings for many companies came in above expectations, and were up sequentially compared with the first quarter. "Quarterly earnings per share for our group were up 17% sequentially, the first sequential increase since [third] 2001 quarter," says Banc of America Securities analyst James K. Wicklund. "However, the fun is just beginning. Consensus estimates for the group currently forecast 41% sequential upside for the [third] 2003 quarter and then 17% additional sequential growth in the [fourth] quarter." Geoff Kieburtz, a Citigroup analyst, noted that sequentially, U.S. land drilling activity rose 17%, the Gulf of Mexico rig count was flat, and the international rig count rose 3%. "Compared to the [first] quarter, the principal growth, surprisingly, emanated from Latin America," he says. Wicklund agrees that strength in Latin America, especially Mexico, was a positive surprise for the quarter. Activity in Mexico was just one of the bright spots for BJ Services, which reported a year-over- year increase in operating income of 71.86% for the second quarter. "Mexican revenue has more than doubled in the past three quarters," notes Sanders Morris Harris analyst Robert Ford. "We believe it could double again over the next 12 months." BJ and partner Precision Drilling were awarded a 285-well contract extension in the Burgos Basin, valued at $339 million, for the third quarter, Ford says. Activity levels aside, Wall Street was watching BJ closely for signs of success in its efforts to implement pricing increases. BJ announced last quarter that it would raise U.S. pressure pumping and completion products pricing 7%, U.S. Unichem products pricing 4% and Canadian prices 5%. Those efforts have been successful thus far. "The price book increases look to be sticking with 50% of U.S. customers on the new book now and 66% projected to be on by the end of the September quarter, as well as 50% of the Canadian customers projected to be on by the end of the December quarter and 100% on by the end of the March quarter," Wicklund says. He estimates the pricing increases should help BJ achieve annual fiscal earnings per share growth of 59% in 2004. Another strong performer among the general service and supply firms was FMC Technologies, which experienced a 54.4% increase in its energy-systems group's operating income compared with the second quarter last year. Subsea activity was the main driver-FMC's Energy Production division experienced a 36% increase in subsea revenue year-over-year, says Lehman Brothers analyst James Crandell. Subsea project awards tend to be lumpy throughout the year, and new orders for the second quarter dropped 34% from the first quarter, Crandell says. However, there are currently 40 to 50 subsea projects that are scheduled to be awarded in the future, and many of those will be by operators with which FMC has alliances. Crandell believes FMC has a good chance of being awarded BP Plc's Atlantis Field in the Gulf of Mexico and Block18 project in Angola, Woodside Petroleum Ltd.'s Enfield and Chinquetti fields in Australia, and Total's Moho Bilondo project in the Congo. Wicklund expects annual revenue growth for FMC's subsea work to exceed 15% during the next several years. Among the giant firms, Baker Hughes Inc. was a bright spot, with quarterly operating income up 24.84% year-over-year. The company did well sequentially as well. "Every division in the oilfield segment increased both revenue and operating margin sequentially," Ford says. "In addition, every division's sequential incremental operating margin was 33% or better." Baker Atlas (wireline logging) and Centrilift (pumping systems) were the two best performing divisions for the company. Inteq (directional drilling, logging while drilling and other drilling-related services) is lagging behind somewhat, but Ford expects cost reduction efforts in the North Sea to positively affect operating results in the third quarter. Ford lauds Baker Hughes for reducing debt during the past three years from $2.9 billion to $1.6 billion, essentially cutting debt to pre-Western Atlas merger levels. However, the roughly 150 million shares Baker Hughes issued to purchase Western Atlas are still in existence. "What we would like to see now is a major reduction in the share count to improve relative operating leverage," he says. "...We expect the company to generate $736 million of free cash over the next six quarters, enough to repurchase over 7% of outstanding shares at the current stock price." The company is working toward a reduction in share count. During the quarter, Baker Hughes bought back 2.2 million of its shares at an average price of $28.69, Ford says. In the offshore service segment, companies cited the soft Gulf of Mexico market and a delayed return to deepwater activity. -Jodi Wetuski