The demand for energy services is tied to energy prices. But contrary to what the stock market seems to be saying these days, a sharp correction in natural-gas and oil prices doesn't necessarily lead to an immediate halt in drilling activity.
As a result, many service companies, Baker Hughes (NYSE:BHI) among them, are getting punished down to levels where they might be interesting again for the average Fool looking to build a little energy exposure into his or her portfolio.
Management said that the pricing environment remains robust, and the fourth-quarter results back that assertion up. Revenue climbed 19%, with both sides of the business (drilling/evaluation and completion/production) posting solid double-digit growth in sales. Even though operating costs such as labor continue to climb, Baker Hughes is staying ahead of the curve -- operating income jumped 37% in the quarter.
Baker Hughes is something like a smaller version of Schlumberger (NYSE:SLB) or Halliburton (NYSE:HAL) -- minus the pressure-pumping business. Companies such as Royal Dutch Shell (NYSE:RDSb) and Chevron (NYSE:CVX) can't do it all for themselves, and when they want to explore new formations, drill wells, or put wells into production, they call upon service companies like Baker Hughes to get the job done.
So it's fair to say that Baker Hughes' business is a product of the budgets and priorities of oil and gas companies. And for those reading this who don't follow the oil/gas space closely, I'll offer up the nugget that just about every major energy company has announced plans to considerably increase its spending on exploration, development, and production in the years to come.
Perhaps we're on the back end of what will prove to be a strange little speculation-driven spike in energy prices. I mean, it's at least theoretically possible that we're heading back to $25 oil and $2 natural gas, though I don't believe that. While I do think we'll see prices settle back into the $50s on oil, that's still an attractive price to many producers, and that should keep service companies like Baker Hughes busy for at least a few more years.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
