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What Does Baker Hughes Expect From the Middle East?

With more than half its revenue generated in North America, Baker Hughes' (NYSE: BHI  ) fourth-quarter and full-year results were weighed down by weakness in this core market. However, there were some bright spots in the report; its international business is showing strength. Looking forward, the company sees that international strength continuing in 2013, and it's expecting big things in the Middle East. 

Baker Hughes continues to build its integrated operations in Iraq and Saudi Arabia, and it expects that it will begin to see significant growth. That growth hasn't always been smooth, especially in Iraq. It's faced a pretty steep learning curve there with difficulty displayed in navigating the lack of transparency and bureaucracy. 

As Baker Hughes has moved up the learning curve over there, it has been able to resolve a lot of issues. While operating there is still a challenge, the company did finish the year with seven rigs operating, and it's mobilizing two to three more in the upcoming quarter. While Iraqi margins won't be a boost to the overall company spread in 2013, it does see Iraq contributing to earnings by late 2013.

Looking to Saudi Arabia, Baker Hughes can't deny the business opportunities there, when combined with Iraq, driving "very handsome returns by the end of the year," according to CFO Peter Ragauss. Last February, the company opened up an unconventional research center in the country. It's working with Saudi Aramco in the southern part of the kingdom, called the Jefora basin, which contains shale gas reservoirs. The plan is to have a frac fleet up and running by the end of the quarter.   

Baker Hughes expects continued expansion of rig fleets in Saudi Arabia as the kingdom works on exploration projects. The kingdom needs to keep its oil production up to get to 12 million barrels a day, with shale gas being part of that equation. This shouldn't come as much of a surprise, as Schlumberger's (NYSE: SLB  ) recent earnings report also highlighted Saudi Arabia as one of its key geographies. It's projects growth in the rig count in the kingdom to bump from 134 to 160, including both shallow-water and deepwater exploration in the Red Sea.

This strength in the Middle East is important for both as the industry continues to struggle with a falloff in North American drilling activity. That weakness is likely to ding Halliburton (NYSE: HAL  ) when it reports earnings tomorrow. With more than half its revenue coming from North America, it too will have to look abroad for growth. 

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9/23/2016 4:00 PM
BHI $49.24 Down -0.91 -1.81%
Baker Hughes CAPS Rating: ***
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Halliburton CAPS Rating: ****
SLB $75.92 Down -1.09 -1.42%
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