Source: Baker Hughes
Baker Hughes' (BHI) third-quarter results were impressive, with the oilfield services giant delivering record sales. Revenue grew a remarkable 9% from last year's third quarter, while net income jumped 10% on a surging North American pressure pumping business and some excellent results in Latin America.
However, falling crude oil prices and the potential slowdown in business over the medium term dominated the quarterly earnings call. For perspective, the stock has tanked nearly 31% since July 1, and the market seems nervous. Management touched on various issues, including product lines, region-specific performance, and, most importantly, the shifting market dynamics caused by lower crude oil prices. Here are five statements from CEO Martin Craighead that Baker Hughes investors should find insightful.
No indication of a business slowdown in the short/medium term
In the near term, we could see customers curtail activity, especially those who are more sensitive to commodity prices, while pursuing marginal onshore and shallow water plays. But for national oil companies and deepwater customers, two areas where Baker Hughes is in a very strong position, we do not expect to see a meaningful change in activity anytime soon.
Internationally, Baker Hughes' major customers are state-run oil companies and deepwater drillers. However, management notes that it doesn't see a slowdown in business for these two customers. Here's why:
With the United States and other non-OPEC countries such as Brazil picking up crude oil production, the global oil supply-demand balance has loosened. As a result, OPEC producers, led by Saudi Arabia, are more keen to defend their global market share and keep production levels high rather that prop up global crude oil prices -- a mistake that Saudi Arabia already committed in the eighties. Last month Saudi Arabia and Kuwait cut prices to the lucrative Asian markets, and this month, to the US. While this move will definitely hurt oil-dependent nations in balancing their budgets, Saudi Arabia has hinted that it can cope with lower prices for some time. All in all, for the near term, national oil companies are going to keep their production volumes high in order to meet aggressive targets set by their governments.
Deepwater projects, on the other hand, have lengthy planning cycles and long production horizons. As a result, these projects are not likely to see a measurable impact in the near term caused by declining oil prices.
Pressure pumping services continue to drive North American revenue and margins
We were very pleased with the tremendous growth in our pressure pumping business. This one product line grew almost 25% in one quarter and accounted for 75% of the sequential revenue increase in North America.
As North American unconventional drilling moves beyond the learning curve, oil companies are drilling better-designed wells with superior production rates and increased estimated ultimate recovery volumes. This isn't surprising, as shareholders have long pushed exploration and production companies to cut spending and increase efficiency. The net result is that service intensity per well has increased, with producers pushing for longer laterals and more stages per well. The ultimate winner is the oilfield service company, and Baker Hughes has positioned itself solidly in the market. Which brings us to the next point.
North American market to remain highly profitable in the near term
[T]he recent increase in activity and service intensity per well has caused strong demand for pressure pumping services and rapid tightening across the market. The trend of more horizontal drilling, longer laterals, more stages per well, and more profit per stage has soaked up the remaining spare capacity in the market. These market forces, along with actions we have taken to transform our pressure pumping business, have set the stage for robust growth in our North America segment accompanied by solid increase in margins for the fourth quarter.
Management believes the pressure pumping market will continue to drive North American profitability in the fourth quarter and next year. The company's remaining cold-stacked equipment is projected to run out by the end of the fourth quarter as demand for pressure pumping is still on an upward curve. The higher fleet utilization should drive revenue. Also, longer laterals and more stages per lateral translate into higher revenue per fleet. Currently, about 70% of the company's fleet is working around the clock. Finally, due to tightening market conditions, Baker Hughes is positioned to command higher revenue per stage. In the last quarter, the company secured contracts with better pricing.
Latin America remains a vital component in international operations
Wins in markets where technology is valued, such as offshore Mexico and Brazil, are resulting in revenue growth and margin expansion.
Source: Baker Hughes
The revival in Latin American operations has continued to impress. In the third quarter, revenue and margins increased predominantly from Argentina and offshore Mexico. More importantly, the company bagged a multiyear contract for deepwater drilling services in Brazil. This includes the use of several of the company's newly introduced technologies such as FASTrak, which conducts real time fluid analysis while drilling, and SeismicTrak, which conducts real-time seismic analysis. With this contract, Baker Hughes becomes a leading supplier in the very important deepwater market.
US and EU sanctions have negligible effect on Russian operations, but the ruble can wreak havoc
...the number of rigs that are actually associated with projects that are being identified in the sanctions is pretty small, very few, very few, and the financial impact in terms of product sales or the services is absolutely inconsequential, and I think that's going to even be going forward for the next couple of quarters assuming that the sanctions stay where they are...
Despite fears that international sanctions on Russia might adversely affect oil companies that have a footprint there, Baker Hughes has steered clear of those projects that face restrictions. As long as the ruble remains stable, there isn't much to worry about regarding Russian operations.
Baker Hughes' 31% stock sell-off since July looks more severe than the fundamentals warrant. This could be a buying opportunity, given the solid underlying business. However, long-term risks remain if oil prices continue sliding, or if any disruptions occur in any of the regions where the company operates. That said, oilfield service companies have greater immunity to volatile commodity prices in comparison to exploration and production companies, as well as rig contractors.
