Baker Hughes Q2 Preview: Stronger Global Upstream Activity, Pumping Improvements Will Drive Results


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Baker Hughes ( BHI ), the world's third largest oilfield services company, is slated to report its Q2 2014 earnings on July 17. We expect the company's earnings to improve on a year-over-year basis, driven by higher exploration and production activity in most of its key geographic markets and by a possible recovery in the U.S. pressure pumping market. During the first quarter, the company's earnings beat market expectations with revenues growing by around 9.5% year-over-year to $5.73 billion, while adjusted net income rose 27% to $369 million. (( Baker Hughes Q1 2014 Form 10-Q )) Below is a brief look at some of the factors that could drive the company's earnings.

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Higher Global Exploration and Production Activity

Worldwide hydrocarbon exploration and production activity, which is a key revenue driver for oilfield services companies, is likely to have remained upbeat through much of the second quarter. Overall exploration and production spending by oil and gas companies is expected to outpace global GDP growth over the next few years, growing at a rate of roughly 6% to 7% per year.  This spending is supported by a reasonably favorable oil and gas pricing environment, which provides oil companies acceptable economic returns in most geographic regions.  According to data from Baker Hughes, the total worldwide rig count rose by roughly 6% year-over-year for the first two months of Q2, with activity in the Eastern Hemisphere proving to be particularly strong. The Middle East saw the rig count rise by roughly 15% year-over-year, on the back of strong gas-directed activity in Saudi Arabia and some rig mobilizations in Iraq, while the rig count in Europe also grew by about 15% driven by higher activity in markets such as Turkey. Africa has also seen strong growth, with the rig count rising by about 11% , led by offshore activity in markets like Angola and significantly higher onshore drilling in Kenya. We believe that Baker Hughes' results could meaningfully reflect the higher global activity, considering its broad geographic footprint.

Signs of Recovery In North America Pressure Pumping Operations

Over the last two years, the market for pressure pumping services in the United States has been beset by weak gas prices, an oversupply of horsepower and stiff competition from smaller companies. This has had a particularly pronounced impact on Baker Hughes, which counts pumping as one of its most important product lines, accounting for roughly 20% of its global revenues. However, things have been improving of late and the excess horsepower in the market has been tightening much faster than expected. Some of the factors driving the recovery include higher natural gas prices through the first half of the year ($4.50+ per MMBtu), increasing unconventional drilling activity (the horizontal rig count is up by 9% year-over-year for the first 5 months in the U.S.) and an increasing stage count for fracking operations. Moreover, the number of wells drilled per rig has also been growing rapidly on the back of the adoption of pad-based drilling, and this has resulted in drilling efficiency outpacing efficiency growth for completion activities such as pumping. This could also translate to better demand. Baker Hughes has also been resorting to several 'self-help' initiatives, ranging from running more 24-hour frac jobs to upgrading its fracking trucks to run on both natural gas and diesel. We believe that the improving market and operational improvements could translate to better revenues and margins for Baker Hughes' North American business.

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