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3 Key Industry Trends Baker Hughes, a GE Company's Management Thinks You Should Know

By Tyler Crowe - Dec 4, 2017 at 11:32AM

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The times they are a-changin' and BHGE's management envisions the new company inhabiting a unique space in the industry.

Aside from being a nominee for worst company name of the year, Baker Hughes, a GE Company (BKR -0.08%) had a tough first quarter as a combined company as restructuring costs led to a big hit to the bottom line. For now, management gets an incomplete grade because the business is still going through the growing pains that come with such a large integration. 

As is the case with any oil services company this size, though, it is worth listening to what management has to say on its earnings conference calls because it typically provides some interesting insights into the industry. On BHGE's most recent call, CEO Lorenzo Simonelli gave some interesting commentary on the direction of the market as well as how BHGE now fills an interesting role in a rapidly changing market. Here's a few snippets from the call to which investors should pay attention. 

Oil service workers installing equipment in black and white.

Image source: Getty Images.

Is the pickup in international oil drilling revving back up?

The oil story of 2017 has been the success of shale drilling in North America. The industry's ability to lower breakeven costs has allowed producers to boost production at oil prices that would have seemed unthinkable a few years ago. As a result, the declines in production internationally and OPEC's self-imposed limits -- things that would have sent prices skyrocketing in years past -- have barely moved the needle. 

For all the changes in the market, though, there is an expectation that drilling activity internationally will pick back up again. For all the success of North America, there are some infrastructure limitations that will likely prohibit it from offsetting all of those international losses. That means, eventually, international drilling activity will pick back up again. According to CEO Lorenzo Simonelli, that time has yet to arrive in earnest.

International activity in oilfield services remains muted with rig count flat year-to-date. However we are seeing signs of activity increase both in the volume and size of tenders for new work as customers feel more confident about their operating cost and commodity price stability. To that point we were awarded a large multi year integrated drilling contract with an important customer in the Middle East as well as two critical deep water completion contracts in Latin America offshore.

A unique offering that no other oil services company can replicate

The combination of Baker Hughes and General Electric's (GE -1.35%) oil & gas division was something that the industry hasn't seen in a long time: A company that is both a provider of equipment and a services contractor. With this combination, BHGE can do some things that no other oil services company can do. Here's Simonelli explaining that offering. 

During the quarter we also announced what is the first demonstration of our ability to generate value for our customers through our full stream offering. The agreement executed with Twinza Oil will provide support for an offshore development project in Papua New Guinea. This business model is an exciting development for the industry. With the combination of capability between our oilfield equipment, oilfield services and turbomachinery segments can provide a unique high productivity value proposition for our customers and commercial differentiation.

Historically, equipment and services were separate because an equipment supplier didn't want to restrict its sales to a single service provider. Likewise, services providers didn't want to tie in with equipment manufacturers because it allowed them to shop for the best price in a competitive bidding process.

Over time, though, this manufacturer/service provider line has blurred as technology and data require equipment and services to integrate on common software platforms. Schlumberger (SLB 0.87%) made a similar move with the acquisition of Cameron International, which meant Schlumberger could present complete equipment and service packages for deepwater clients.

The BHGE full stream deal is like the Schlumberger deal on steroids. It can offer just about every service and piece of equipment necessary to go from a prospective reservoir all the way to late-life production management as well as provide the equipment for midstream and downstream investments. BHGE is betting that more and more producers will want to go down this route to cut costs through the efficiency that a single service provider and using a common software to handle all the data that comes from a drilling operation today can provide. 

BHGE Chart

BHGE data by YCharts.

Where can we find growth now?

Even when equipment and services companies combine, their business will still wax and wane drastically with the spending habits of oil and gas producers and the upstream side of the business. This typically means the industry goes through times of feast and famine depending on oil prices and producers' appetite for capital spending. These past few years have been evidence of how that can spell big trouble for these companies as many small players have gone bankrupt and the larger ones have tried to consolidate

With the addition of the GE oil & gas division, though, BHGE has exposure to other parts of the oil and gas value chain. Which, according to Simonelli, could drive earnings over the short term. 

Opportunities for growth in the short to midterm exists across the board in mid-stream and downstream segments in which we participate, these include, gas to power projects, stranded gas monetization, pipelines and surface compressions to name a few. Many of these applications acquire a range of turbomachinery equipments that is fit for purpose in terms of both cost and function.

Typically, capital spending in the midstream and downstream segments are lower than on the upstream side because the life of assets such as pipelines or refineries are much longer than that of an oil reservoir. Therefore, companies in this part of the value chain don't need to spend nearly as much to maintain their current business. Also, growth in these businesses is much more measured. 

At the same time, though, capital spending in these industries is much more consistent than on the upstream side of the business. This could make BHGE a company that is better suited for the ups and downs of the market than its upstream only brethren.

What a Fool believes

BHGE has a lot of potential as an investment in the oil and gas industry. The unique combination of services and equipment that serves all aspects of the industry could prove to be incredibly valuable as others grabble with the volatility of the upstream industry. The issue that comes with serving all of these segments is bloat that could impact margins. Management thinks it can wring out $1.6 billion in revenue and cost efficiencies between now and 2020, but it remains to be seen that it can do that. If the company can deliver progress on this substantial synergy plan and prove that serving all parts of the oil and gas industry has inherent advantages over the traditional model, then BHGE's stock could be a stock worth examining.

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Stocks Mentioned

Baker Hughes, a GE company Stock Quote
Baker Hughes, a GE company
BKR
$30.05 (-0.08%) $0.03
General Electric Company Stock Quote
General Electric Company
GE
$64.99 (-1.35%) $0.89
Schlumberger Limited Stock Quote
Schlumberger Limited
SLB
$37.29 (0.87%) $0.32

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