Halliburton Co , the world's second-largest oilfield services company, reported a higher quarterly profit as North American sales hit a record high despite major challenges, and its shares rose more than 4 percent.

Chief Executive Officer David Lesar attributed the company's strength in North America to new oil drilling activity in the United States. That helped offset a drop in natural gas drilling due to weak prices, which have fallen to their lowest point in a decade.

Halliburton is the market leader in pressure pumping, used in hydraulic fracturing to extract oil and gas from shale. New technology has opened up new sources that are likely to keep prices low for years.

Lesar said he expected the downward push on the pricing for hydraulic fracturing to ease up later this year, but said the huge shift of resources out of natural gas basins would weigh on the North American market leader in the near term.

While these moves are beneficial to us in the long run, they do not come without a short-term impact on our margins, Lesar said on a conference call with analysts on Wednesday.

Halliburton is moving five more fracking fleets in addition to the eight moved last quarter, he said. Like many smaller rivals, the company is deferring some new deliveries of pressure pumping equipment, which is used in fracking, until next year.

We believe the (North American) pressure pumping capacity concerns will continue to overhang the stock over the coming several quarters, UBS analyst Angie Sedita said in a note to investors. However, it is already reflected in the stock, given the company's 45 percent discount to historical valuations.

Halliburton shares were up 4.5 percent at $34.13 in midday trading on Wednesday, while global market leader Schlumberger NV was up 0.7 percent.

Halliburton said its first-quarter profit rose to $627 million, or 68 cents per share, from $511 million, or 56 cents per share, a year earlier.

Excluding one-time items that included a $300 million charge for estimated losses from the BP Plc Gulf of Mexico oil spill two years ago, earnings per share of 89 cents topped the analysts' average estimate of 85 cents, according to Thomson Reuters I/B/E/S.

Revenue rose 30 percent to $6.9 billion, including a record $4.2 billion in North America.

Halliburton earned more than three-quarters of its 2011 income in North America, compared with two-fifths for Schlumberger.

Halliburton said its North American margins would fall into the low 20 percent range by the end of 2012, down from about 25 percent currently, in what Chief Financial Officer Mark McCollum described as a dynamic market.

These margin expectations depend on, among other things, our success in recovering inflationary cost increases from our customers, and how soon the natural gas rig count levels off, McCollum said. We should have a better feel for this after the second quarter.

The company has suffered as guar, a key ingredient for fracking fluid derived from a crop mostly grown in India, rose in price by 10 times in the past year.

McCollum said the guar gel system can now represent more than 30 percent of the total frack price to Halliburton customers in certain basins.

McCollum said he expected North American margins to drop by between 2 and 2.5 percentage points in the second quarter. But Simmons & Co analysts said industry leaders would be much better able than smaller companies to withstand this kind of pressure.

Shares of Baker Hughes Inc , which issued a warning about troubles in the North American market last month, were unchanged on Wednesday. The No. 3 oilfield services company reports quarterly results on Tuesday, following Schlumberger's earnings release on Friday.

(Reporting by Matt Daily in New York and Braden Reddall in San Francisco; Editing by Maureen Bavdek and Lisa Von Ahn)

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