Never in history have oilfield services companies played a role so critical to crude oil production as they are playing today. Whether it's providing real-time data from 25,000 feet below ground level at the Bakken shale formation, or providing solutions to increase the productive life of a 50-year-old legacy well in Saudi Arabia, this oilfield service company plays a critical role in the exploration and production of oil and natural gas.
In the last 12 months, Baker Hughes Incorporated (BHI) has been the best performer among the Big Three in oilfield services. With its stock returning 49%, it soundly beat peers Halliburton (HAL 1.52%) and Schlumberger (SLB -0.16%) which, respectively, rose 41% and 34% within the same time frame. But Baker Hughes looks fully capable of sustaining its solid run.
Below are three reasons Baker Hughes could be rewarding to shareholders in the long run. While this isn't a prediction to what levels the stock price will rise, there are compelling reasons to be bullish about the company's long-term prospects. Let's explore.
A consistent drive for innovation leading to value creation
Baker Hughes' mission seems clear: To drill more efficiently, optimize production, and improve ultimate recovery of resources. The oil and gas industry is constantly on the lookout for newer technologies that will reduce costs and boost output. And Baker Hughes seems to have understood that pretty well.
The company's game-changing artificial lift system is the world's first such system to be deployed in the horizontal section of an unconventional well. This helps in achieving higher production rates. The system is scheduled for a third-quarter launch. Similarly, its automated drilling systems, capable of drilling more than one mile a day, and thus cutting down drilling times drastically, are in big demand.
Baker Hughes is also in a strategic alliance with Norway-based Aker Solutions to develop technology for subsea fields. This production alliance will combine Aker's forte in subsea production and processing systems with Baker Hughes' expertise in well completions and artificial lift systems. Integrated solutions are becoming more of the norm in the oilfield services industry.
Robust North American outlook
Overall customer spending in North America is expected to increase, and this shouldn't come as a surprise for those who are following the North American oil and gas industry. However, what many might be missing are the subtle shifts in the dynamics of the industry.
Once, rig count alone was sufficient to provide an accurate proxy for oilfield related activity. Not anymore. With producers now demanding higher production volumes per well, the service intensity per well is on the rise. Customers are now focusing on superior well designs and greater use of artificial lift methods in order to enhance initial production (IP) rates, as well as increase the estimated ultimate recovery rate (EUR) per well. Consequently, this opens up more opportunities for revenue growth for service companies. And Baker Hughes offers industry-leading innovative products that lead to more efficient well construction, optimize well production, and increase ultimate recovery volumes.
In North America, rig count for 2014 is expected to increase by a modest 5%. However, we notice that Baker Hughes' North American revenue growth far outpaced the rig count growth. During the second-quarter earnings call, CEO Martin Craighead mentioned that this phenomenon is likely to continue because service intensity per well is expected to go up. In other words, oil producers are willing to pay service providers such as Baker Hughes to not only complete more wells, but to increase the productivity per well. Keep in mind, North America accounts for almost half of the company's total revenue.
Solid growth in international operations
For the second quarter, Baker Hughes' international revenue grew a healthy 11% year over year, and this is an unmistakable sign of the company's growing international presence. Also, this segment is steadily claiming a greater percentage in the revenue pie chart than in the previous quarters.
Across the globe, the drivers of oil and gas commercialization are changing. To meet local demand growth, emerging economies are increasingly focusing on exploration and development of native oil and natural gas resources rather than depend on imports. High international oil prices are making it attractive to pursue major exploratory projects. In particular, rig activity is expected to increase in Saudi Arabia, China, West Africa, and Russia. This once again opens lucrative opportunities for oilfield service providers. Baker Hughes is just making sure it is in the right place at the right time! And it is seemingly doing a great job at that.
The company's second-quarter revenue from the Middle East and Asia Pacific segment grew a solid 18% from last year. Additionally, the Europe/Africa/Russia Caspian segment grew a healthy 10%. Investors must also note that the development of unconventional oil and gas deposits is still in its infancy outside of North America. The general consensus is that development of these resources will play a more prominent role in the future of global oil and gas development. Again, Baker Hughes' expertise should come into the picture.
The Foolish bottom line
Baker Hughes looks well positioned to create value in the ever-changing dynamics of the oil services industry. Additionally, growth in global crude oil demand -- led by emerging markets -- is creating immense opportunity for oilfield services companies. Service intensity per well is also on the rise. Baker Hughes seems perfectly placed to cash in.