One Company Shaking up the Unconventional Oil Space

More cash and less debt on top of an earnings beat made Baker Hughes (NYSE: BHI  ) investors very happy recently. Cash increased by $245 million to $1.37 billion as debt decreased by $334 million to $4.58 billion, sequentially. While Baker Hughes is a $25 billion oilfield services company, it never hurts to improve your balance sheet.

Baker Hughes benefited from margin expansion in the Middle East/Asia-Pacific and Europe/Africa/Russia Caspian regions, but its biggest segment saw margins contract.

North America
North America makes up 49.3% of Baker Hughes' revenue, so in order for Baker Hughes to keep beating market expectations going forward it needs to focus on its core operations.

Baker Hughes sees a turnaround in Canada and a more efficient pressure pumping operation compensating for the drop in the number of operated rigs. In 2013 Baker Hughes sees the average US rig count being 9% less than in 2012, yet only 3% less wells will be completed due to drilling efficiencies.

Innovative 
One way Baker Hughes plans on helping out both the environment and oil producers is with its Rhino Bifuel innovation. Baker Hughes' Rhino Bifuel simulation can replace up to 70% of the diesel fuel used for pressure pumping with natural gas. This both reduces pollution and energy costs, which is why Baker Hughes is operating a whole fleet yet is still seeing demand exceed expectations.

Baker Hughes can merge its H2PrO water management service with its pressure pumping and further reduce well completion costs for E&P players using mostly or only recycled water and a cheaper energy source. Now that most of the low hanging fruit has been cut off the branches, oil producers are still seeking to maximize budgets and reduce well completion costs.

Natural gas
Record low natural gas prices have forced the number of gas rigs down from ~900 at the end of 2011 to only ~350 today. This took a big chomp out of drilling activity in North America, even as shale drilling took off. Chesapeake Energy (NYSE: CHK  ) , a major natural gas producer, is a perfect example to showcase this.

Chesapeake Energy spent 90% of its capital expenditure budget on dry gas drilling back in 2009. By 2011 Chesapeake Energy cut that to 54% and for 2013, Chesapeake Energy plans on spending only 14% of its capex budget for dry gas production. This caused the number of dry gas rigs Chesapeake Energy operated to fall substantially, from over 100 to less than 20.

As Chesapeake Energy kept reducing capex, its natural gas production went with it. In Chesapeake Energy's third quarter results it posted a 10% drop in dry gas production, which it is happy to tout. Dry gas is too cheap to make a profit off of, so Chesapeake Energy has decided to move into liquid-rich shale plays.

But what if natural gas prices have bottomed and are going to head back up? The War on Coal rages on and is forcing numerous plants to shut down. Some of those plants are being converted to burn natural gas to generate electricity, which boosts domestic demand. In a few years LNG exports to Asia and Europe will further increase demand for dry gas and producers will be able to tap into foreign markets for the first time.

More domestic demand and access to foreign prices may entice dry gas producers like Chesapeake Energy to reconsider their abandonment of natural gas. If natural gas drilling activity picks up, Baker Hughes will be a major beneficiary.  

Final thoughts
Baker Hughes' largest segment may have to deal with declining drilling activity due to low natural gas prices, but it is able to compensate with innovative services that save E&P players money. Baker Hughes is well positioned for the shale revolution and for the possible return of natural gas drilling activity.

On the international front Baker Hughes sees the average operated rig count rising by 5% in 2013, which will provide a nice growth headwind for its other divisions.

Another oil and gas services player poised for growth
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2747551, ~/Articles/ArticleHandler.aspx, 10/30/2014 10:14:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement