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Baker Hughes: Turnabout in North American Rig Count

The North American drilling rig count should average 2,400 rigs in 2012, up 5% from a year ago, but it won't take its traditional natural gas trajectory, Baker Hughes Inc. executives said last week. Operators are "drastically" shifting from gas targets, and Baker is seeing the beginnings of a "tidal wave" preparing to ride into the Permian Basin.

CEO Martin Craighead, joined on a conference call last week by CFO Peter Ragauss, spoke with energy analysts about Baker's full-year 2012 rig count guidance forecast, as well as operational results for the Houston oilfield services operator during the first three months of this year. The firm has provided worldwide rig count tallies since 1944, a yardstick for the energy industry in tracking drilling activity in the onshore and offshore.

"We continue to expect the average annual rig count for North America to grow by 5% from an average of 2,296 rigs in 2011 to an average of 2,400 rigs in 2012," said Ragauss. "However, the mix of natural gas versus oil has changed drastically.

"Compared to 4Q2011, we expect the U.S. natural gas rig count to exit 2012 with 534 rigs, a decline of 275 rigs. We expect the U.S. oil rig count to exit the year with 1,444 rigs, an increase of 251 rigs."

According to Baker, total U.S. drilling rig activity as of Friday (April 27) was 1,945, a drop of 27 from the week ending April 20. The number of domestic gas rigs was down by 18 from the previous week to 613, while there were nine fewer oil rigs at 1,328. The total number of Canadian rigs for the week fell by 12 rigs to 134 from the week before.

Like No. 1 oilfield services operator Schlumberger Ltd. and No. 2 Halliburton Co., which in recent days have reported pressure pumping issues in the North American onshore, Baker, the third largest provider, also is feeling some constraints (see related story). But Craighead said there also is a plethora of opportunities.

A big expansion of oilfield services is seen ahead in the Permian Basin, of late the mecca for operators looking for liquids-rich reserves in the old guard oil and gas formations, said Craighead.

"We expect to see the same tidal wave shift to more horizontal and service intensive activity as we've seen in other areas in the past," he said. The Permian Basin "is the next important basin, where we believe new opportunities will continue to evolve."

Today there are "over 300 vertical rigs and only 100 horizontal rigs" operating in the basin, and with most unconventional drilling requiring horizontal drilling with fracture stimulation, the market is wide open, he said. "This is an area where Baker Hughes is particularly strong."

Like its competitors, Baker's "margins in North America were lower than the fourth quarter due to challenges in the pressure pumping product line, including the rapid transition from natural gas to oil-directed drilling rig activity, the increasing supply of pressure pumping capacity across the market, as well as company-specific supply chain challenges," Craighead noted. "We are addressing our supply chain challenges by improving our distribution network, increasing supplies of critical raw materials and enhancing the utilization of our fleets and other critical assets."

To overcome some of the challenges, some "supply chain enhancements" were completed to maximize the fleet utilization. For example, the company "had 72 trucking companies just in South Texas. Today we have 12 trucking companies. It makes for better pricing and logistics...People issues, the movement of fleets and the supply chain followed. We expect to see the majority of this pick-up in the second half [of the year], but already we're getting some incremental gains that will go well into 2013."

Baker's "technological advantages" also are helping as operators shift to oil targets, he said.

Among the hydraulic fracturing (fracking) technology introduced in North America's onshore early this year was an 11-stage "Frac-Point" system, which has 22 multiport sleeves with proprietary "DirectConnect" ports. The technology allows frack initiation from multiple ports in each isolated horizontal section of a well to maximize reservoir contact. Baker Hughes also installed a 30-stage "OptiPort" completion system for its U.S. land operations, the first deployed in central Oklahoma, which allows the customer to choose where to locate the sleeve and initiate the fracks, with an unlimited number of zones to save time and lower fluid consumption.

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