Baker Hughes Inc: Innovation, Integration, and Interdependence

Baker Hughes' (NYSE: BHI  ) management is setting the company up for long-term outperformance. The company recently hosted its annual analyst conference and highlighted the key drivers of the company's growth strategy. It also highlighted several new technology introductions, including tools and equipment to help customers solve their most pressing problems of well conversion efficiency, optimizing production profiles, and improving ultimate recovery.

Three key strategies
Baker Hughes is focused on three key strategies to drive shareholder value: 1) driving earnings through innovation and pushing the pace of commercialization; 2) driving EPS through integration, creating new service combinations from within the existing portfolio; and 3) driving earnings through interdependence, redefining the relationship with the company's customers. The new strategy should lead to a renewed confidence in Baker Hughes and lead to a better partnership between the company and its customers.

Source: Baker Hughes

Financial targets and cultural change
The company for the first time has set specific long-term financial targets. Baker is targeting EPS of more than $6 by 2016. This is up 125% from 2013 EPS of $2.68 and up 45% from 2014 consensus estimates of $4.14. Baker Hughes' transformation is largely complete, and the new strategic growth priorities are in place to drive outsized growth.

There is also a cultural change under way at Baker Hughes that should lead to more consistent operational performance. The company is creating an ownership culture where managers are taking ownership of the financial targets that they set. The new culture also includes a greater emphasis on partnership, both inside the firm among the different business units and outside the firm with customers, with a focus on solving key customer problems.

Source: Baker Hughes

Partnership with customers
According to the company, the three most pressing problems for customers include well conversion efficiency, optimizing production profiles, and improving ultimate recovery. Firstly, the company intends to help customers in drilling wells efficiently through innovative drillbits, rotary steerable tools, and other products. Secondly, the company is targeting production enhancement and optimal field development by providing customers with efficient and cost-effective completions. Finally, the company is integrating all of its service offerings to give customers an effective life of field solution.

New technologies
The company also introduced a new artificial lift technology, Linear Electromagnetic Actuated Pump (LEAP), which if successful could displace traditional rod-life systems. Rod lift is currently the only proven technology for low flow wells, the kind that are being drilled in U.S. shales and where oil production typically falls below 50 barrels a day after a year of production.

Growth in oil related drilling in the U.S. shales has generated a significant demand for the traditional rod lift systems, a tried method that customers have been using for a long time. However, due to the low-tech nature of the rod lift systems, companies like Baker Hughes and Schlumberger (NYSE: SLB  ) ignored it and have instead focused on the high-tech part of the segment, Electronic Submersible Pumps, which typically work in high flow wells found in the deepwater and the international markets.

While Baker Hughes and Schlumberger have ignored the rod lift market in the past, companies like Weatherford International  (NYSE: WFT  ) have been major beneficiaries of a surge in demand for the traditional rod lift systems. However, driven by growth in U.S. shale, the size of the rod lift market has grown significantly in the last couple of years. This has also grabbed the attention of Baker Hughes, which is now looking for a more elegant solution for these low flow U.S. shale wells.

The company recently introduced FlexPump and now the LEAP system, which if successful could completely revolutionize the U.S. market. LEAP is expected to work well with a range of low flow rates (1-1,000 barrels per day), will require less maintenance, and will be more efficient.

Bottom line
Baker Hughes, similar to its peers, remains well positioned for the unfolding North American recovery and robust growth in the Eastern Hemisphere. The company has exciting products in the pipeline, including products like LEAP, which could be game changers and could potentially revolutionize the lucrative U.S. artificial lift market. The transformation phase of Baker Hughes is over, and a new pulse, a new energy, and a new spirit are creating a new culture and a new identity for the company.

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