The idea of Baker Hughes Inc. shrinking its global footprint isn't exactly the image that CEO Martin Craighead tried to convey on Tuesday in a business update, but one thing was clear: U.S. fracture jobs are no longer a priority.
Craighead, who held his first conference call with investors in more than a year, since the merger with Halliburton Co. was underway, spent more than an hour discussing where the company goes now that the merger is kaput (see Shale Daily, May 2). It goes forward. Baker Hughes is "turning the page on that chapter and looking to the future."
The CEO signaled on Monday that U.S. pressure pumping, i.e. hydraulic fracturing, might take a back seat to other Baker Hughes technology-driven businesses, including artificial lift. Craighead said he didn't know if the company planned to shrink its footprint pressure pumping-wise "or if it seems like the market is doing that for us at times...Every product line has to earn its right and...It's very capital intensive..."
The industry overall is unaware of what's been transpiring in the U.S. onshore fracture markets, he explained.
Most of the pricing traction by Baker Hughes and its competitors came before the 2014 oil price slump. Many new operators stormed into the business when prices were high and many remain, Craighead said.
Baker Hughes market share over the period “changed a lot in terms of the demand for utilization.” He estimated that more than 50 independent companies grabbed a piece of the fracturing market before prices plunged “and to date, we haven’t seen anywhere near that many leave…”
Before the oil price bust, an oilfield service company's advantage in the U.S. onshore was whether it could run 24 hours/day, seven days a week. It was its supply chain infrastructure. Not so today, Craighead said .
"Today, one of the latest surveys that came out was that 93% of the decisionmaking by the customer community in that product line is price."
Price may not be the dominant factor once the recovery begins, but "I don't think it's going to go back to where it was in terms of valuing some of the other attributes in that product line."
And as that segment has evolved, Baker Hughes has to as well -- or suffer the consequences.
Fracturing has become "pumping just sand and slickwater -- and yet unfortunately, or fortunately from the eyes of our customer -- to see the well productivities hang in there as strongly as they have worries me a bit as to this product line. Has that business taken a step change down in terms of what our customers are willing to buy?"
Meanwhile, the high-tech operator has capabilities in artificial lift, production chemicals and directional drilling, that are "unlimited, absolutely unlimited," Craighead said. "But pumping sand in the ground with slickwater in a capital-intensive business? You've got to get really good at understanding how you're going to make money and where you're going to make it...We're going to play smart..."
Pressure pumping typically had been a pull-through bonus for sales, in which customers bundled equipment.
"A lot of that pull-through is associated with is, if you have the horsepower, then you can get some of the other product lines, right? And that's certainly not the case today," the CEO said. "When we look forward and see some of the pictures that have been flying around the Internet with all these yards of just hectares of pressure pumping equipment, and you look at how long...it could be before some of this capacity comes back on, I just don't see that if you will have a bigger stick moving back to the service community being able to force bundling."
Regarding when the macro environment could move in a positive direction, Craighead said "one potential scenario is that oil markets could move back into some kind of balance by the end of 2016."
The North American market "has made incredible strides lowering the cost of production, overall costs and full-cycle economics," but for our clients it is still higher than in many other parts of the world. As a result, especially as companies focus on strengthening their balance sheets at the first signs of recovery, activity could remain lower for longer until we see a more sustainable increase in oil prices."
In the near-term, Baker Hughes will go where the opportunities exist. Its "innovation culture" routinely delivers new products and capabilities, with a customer base wide and deep. "We are already differentiated in the market and we intend to build on that position."
The initial surge in North America likely is to be in the drilled but uncompleted (DUC) category, "which extends to some 5,000 wells across the various basins," Craighead said. "As the oil price climbs back into the mid-$50s, the completion schedules are estimated to ramp to several hundred wells per month, representing a two-year period of steady activity before this inventory comes back to normal levels."
DUCs represent the biggest opportunities for artificial lift and chemical product lines as wells are ramped up. Similar opportunities exist in the Gulf of Mexico for drilling and completion.
"During the industry downturn we were able to take a much closer look at all aspects of our business, not just in the context of our own performance, but in the context of a material shift in the market and the industry that has occurred over the past year and a half," the CEO said. "The extreme turbulence in the energy market place since the end of 2014 has caused our entire sector to reexamine assumptions for operating economics for the future."
For Baker Hughes, the review led to a "different" idea of a business model, with opportunities to simplify the organizational structure and operational footprint; change the go-to-market strategy, and optimize the capital structure.
To align with the Halliburton merger agreement, Baker Hughes had retained some of its services, even though there was little market for some, which represented more than 500 basis points of margin overhang in the first quarter. To bring the overhang in line, the company plans to achieve annualized savings of $500 million by the end of 2016.
Going forward, Baker Hughes plans to become "more selective and more creative as we look at opportunities for our product lines globally," he said. With the down market, "we see a lot of capacity parked on the sidelines that is being acquired for cents on the dollar today, and therefore can be rapidly redeployed with very low operating costs."
Baker Hughes plans to remain active in the U.S. onshore, particularly "in two basins that today represent roughly 45% of active rigs and 35% of the drilled and uncompleted wells, thus the largest opportunity for growth going forward," Craighead said. The most active basin in the U.S. onshore is the Permian.
The company also plans to revamp into an "asset-light model" to reduce risk and improve capital returns.
"I can tell you that it's going to be a flatter organization," Craighead said. "It's going to be a simplified organization..." It doesn't mean Baker Hughes plans a "full-scale exit or anything like that. It simply means we're going to be a supplier to a broader set of customers in these markets. I think that's a dramatic shift, one that you've never heard of before from any of the Big Three service companies."