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Baker Hughes: Service Intensity Per Rig Increasing

Driven by sustained intensity in the U.S. onshore and a slow recovery in the Gulf of Mexico (GOM), the domestic rig count should average 1,850 in 2011, which would be 20% higher than in 2010, Baker Hughes Inc. said Monday.

In Canada the rig count is expected to hit 400 this year, which would be 15% higher year/year, CEO Chad Deaton said during a conference call with energy analysts.

"We remain confident in the underlying strength of the U.S. market and we're encouraged by the ever-increasing number of unconventional plays our customers are asking us to help them exploit," Deaton said. "We maintained superior margins in North America throughout the cycle...

In North America's onshore, there is a "widening disconnect" between the number of rigs drilling and the services needed to complete them, said COO Martin Craighead. Because of the disconnect, it's difficult to forecast how many rigs are needed, he explained.

"The near-term supply is not only in pressure pumping" but other drilling services, Craighead explained. This "service intensity per rig is driven by three forces," which are rigs that are more efficient, horizontal drilling techniques that continue to improve, and hydraulic fracturing (fracturing) techniques that continue to be optimized.

"Since the start of 2010 we've seen a 30% increase in the number of stages fracked per well," he said. "And we've seen a 40% increase in frack technology. This dynamic change has led to a widening disconnect between the rig count and revenue per growth...Today we're generating revenue beyond what the rig count would historically suggest by pushing new technologies...and better well construction techniques have led to longer laterals..."

Baker Hughes secured $400 million in new multi-service contracts during the latest quarter, Craighead told analysts. The company continues to launch more efficient drilling technology but "the longer laterals cannot continue indefinitely." However, "we haven't seen the end of possibilities in the marketplace to become more efficient and provide reliable performance. These are game changers that only a few can do and Baker Hughes is one of them."

More revenue is expected to be generated for Baker Hughes because the demand for oilfield services is exceeding the ability to provide them, said Deaton. Executives at Schlumberger Ltd. and Halliburton Co. last week made similar comments about the growing backlog for drilling completion services.

The Houston-based oilfield services provider posted better than expected 2Q2011 earnings, with net profits of $338 million (77 cents/share) from $93 million (23 cents) a year earlier. Excluding charges the company earned 93 cents/share, which was 2 cents higher than average Wall Street forecasts. Revenue in the latest period jumped 41% to $4.74 billion. North American revenue in the latest quarter jumped 37% year/year (y/y) and was up 1% sequentially.

North America revenue jumped 37% y/y and 1% sequentially to total $2.36 billion in the latest period. Profit margins were up 19% from the year-ago period. Canada's spring ice break-up, which leads to a slowdown in drilling activity, "provided some headwinds" but "fundamentals are strong" across North America, said Deaton.

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