Baker Hughes Incorporated (BHI +0.00%) delivered impressive fourth quarter and 2014 results comfortably beating consensus estimates. However, the uncertainty created by plummeting oil prices and the potential slowdown in business in 2015 dominated the earnings conference call. Investors and analysts, alike, are particularly nervous about the company's performance in North America which accounts for almost half the company's total revenue.
Management discussed how it plans to negotiate the industry downturn and the shifting market dynamics through technologically advanced offerings and robust international growth. Here are five things management said that Baker Hughes investors should find insightful.
Baker Hughes: Converting innovations into earnings
According to CEO Martin Craighead, the company's strength lies in its ability to introduce technologically advanced products into the market ahead of its peers.
The cornerstone of this strategy is to accelerate new product development and to maximize returns early in the product lifecycle. One of the targets that we shared at our conference was to increase the revenue generated from products within the first 12 months after they have been commercialized.
The company set an ambitious target of generating $1 billion in revenue from new products within the first twelve months after they have been commercialized, a 20% increase from the previous year. Craighead revealed that the company introduced 160 new products and services in 2014, which means a new solution was introduced into the market every 55 hours.
Oil and gas producers are always on the lookout for solutions that make well construction more efficient, optimize production and increase ultimate recovery. That's why bringing out technologically superior solutions is a competitive weapon, the CEO argued.
This strategy should help the company immensely heading into an environment of low oil prices.
Technology to continue playing a crucial role in future, even in the weak oil market
On one side, the whole strategy to keep introducing new solutions into the market looks questionable. Will oil producers pay for new technology in a downturn?
But on the other side, management believes that better products should only help increase oil and gas production efficiency. "When you have a winning strategy, you run," said Craighead.
For example, the company's ProductionWave solution integrates artificial lift technologies with production chemicals and remote monitoring services to optimize production in unconventional drilling. This has the capacity to disrupt the conventional rod lift technology at the correct price point as it decreases overall costs by merging different solutions into one. "Not surprisingly, artificial lift was our fastest growing product line in 2014," quipped Craighead.
The company sees the R&D engineering team as its core, and its ability to deliver new solutions a strong growth driver. In tune to that, management revealed that there are "cooler" products in the pipeline for 2015 and 2016.
Well diversified, hence well cushioned
Craighead said that international markets are more resilient to the downturn in the short term. Thanks to years of hard work, Baker Hughes has built out an international infrastructure and supply chain, notably in the Middle East and central Africa. The company is seeing the fruits today.
This also means that while business in North America could slow down, investors can definitely expect further growth from Asia, Africa and even Latin America. Additionally, margins are also expected to go up in these regions.
Offshore delays have also cleared and a large backlog of deepwater projects are in the pipeline. The Gulf of Mexico has witnessed strong rebounds in drilling activity which should remain robust in the near term. Management feels that the Gulf of Mexico is the most stable among the three key deepwater basins, the other two being offshore Angola and Brazil.
The impending merger with Halliburton
Without doubt the most significant development in 2014, management however revealed very little about the impending merger with Halliburton (HAL +0.56%) during the call.
The CEO, however, said that he expects this transaction to create long term opportunity for the combined companies as they serve customers with a broader suite of products and services. Currently, the integration teams at both companies are working out the finer details of the merger.
Baker Hughes is stronger heading into the downturn
One of the most important questions in the call was how does Baker Hughes see itself today heading into this downturn versus the last one in 2009.
While Craighead did concede that there would be decreasing margins, he noted that they won't be as bad as it was five years ago. He pointed out that 2009 was a different situation with a global recession in force.
But more importantly, he said that the current geographic diversity in the company's operations should help cushion some of its losses. He specifically mentions that clients from the Middle East and select national oil companies seem to be well insulated to the current environment, and that will be hugely helpful to Baker Hughes.
At the same time, he is ready to take tough decisions to trim the workforce and part ways with projects that can't bring in value to the company.
The takeaway
Management looks confident that the company will weather the current crisis. It is banking on its ability to bring out new technologies that will help increase revenue opportunities. Additionally, it expects the impending merger with Halliburton to create long term opportunities which wouldn't have been possible otherwise, and in turn, deliver a premium to shareholders. All in all, Baker Hughes looks lean and fit to generate long term value.
