Baker Hughes Inc. continues to reposition after the failed merger with Halliburton Co. and is focusing more on drilling product innovation, including longer laterals, and less on pressure pumping, a "water and sand" business that requires less expertise, CEO Martin Craighead said Tuesday.
The Houston-based oilfield services company is fine-tuning its business, as prices look to be range-bound for a lot longer, he said during a conference call to discuss third quarter results. To that end, the global operator plans to keep improving its North American production portfolio over pressure pumping because technology offerings aren't directly tied to the rig count.
"You have a fireball with regards to this drilling technology and the growing lateral lengths, which is really polarizing the market in separating guys who can only offer motors to the guys who can offer rotary steerable tools," Craighead said of North America. "It's been our intention...to continue to make this company focus on what it does best, which in many regards, is going to make us increasingly more unique than our peers."
For now, however, the "competitive landscape remains challenging across the entire segment," Craighead said of North America. Management still is of the mindset that "oil prices in the mid-to-upper $50s are required for a sustainable recovery in North America. Our customers also need to be more confident on the durability of those oil prices before making any significant change to their spending patterns.
"As we previously projected, the North American market has been continuing to grind slowly upward, and we expect that to continue." However, for a "broader recovery to take place, a series of milestones need to be reached before the market can respond in a more predictable way."
Management remains optimistic, but it is positioning "to prosper in a lower-for-longer market environment. In simple terms that means delivering solutions to our customers that result in more efficient wells, optimized production and improved recovery."
To begin with, the "supply-demand surplus has to rebalance, allowing commodity prices to improve," Craighead said. "Second, those commodity prices need to stabilize for confidence in the customer community to improve and their investment to accelerate. And third, activity needs to increase meaningfully before service capacity can be substantially absorbed and pricing recovery take place. Until then, we will continue to see this dislocation we have today in the relationship between commodity prices and services pricing."
In North America, Baker has detected a shift in recent weeks in land activity from what had been mostly small, private exploration and production (E&P) operators that were adding "rigs opportunistically to include larger, more established E&P companies. While we've seen customers growing more opportunistic about the industry outlook, volatility and uncertainty remain, we expect the ramp up to remain slow and pricing to remain challenging. And as a result, we expect only modest growth in the fourth quarter in North America."
After the Halliburton merger was quashed in early May, Baker management returned to core strength as a product innovator, prioritizing technologies such as artificial lift over pressure pumping (see Daily GPI, May 27; May 4).
Secular Changes in Market
The company's competitive advantage is "by far the secular change in the market, with regards to longer laterals," which lines itself up with offerings that include its proportional rotary steerable, the AutoTrak Curve.
"We're the only one with that," Craighead said. "And being able to drill a gauge hole the entire way through the curve, through the lateral, avoid all the micro doglegs that the competitor tools create, as these completions get longer and you've got to get your pipe to bottom...the market is rapidly steering itself right into our drilling bailiwick, if you will. You couple that bottomhole assembly with the drillbit in terms of maximizing steerability and durability, I mean, it's a beautiful thing to watch."
In the Denver-Julesburg (DJ) Basin in Colorado, for example, a historically "drilling motor market," operators have been challenged to drill longer laterals. Conventional drilling systems lack the ability to stay in the target zone on longer laterals, which limits the reach.
During the third quarter, Baker combined its AutoTrak Curve system with its Talon Force bit technology to increase lateral lengths in the DJ from 5,000 feet to 10,000 feet, while drilling wells 30% faster and "delivering gun barrel quality holes," the CEO said. "Speed and reach are important, but speed and reach without borehole quality is a recipe for increased completions costs and premature wear on lift systems.
"So when you hit the sweet spot of fast and good, you have a clear competitive advantage, and that is what Baker Hughes does really well...We now hold nearly 50% of the drilling share in that critical basin." In the Utica Shale, Baker also achieved a record by drilling 13,574 feet in one run -- curve and lateral. Those advantages dictate that Baker put production technology over pressure pumping.
"Artificial lift, I think, is kind of a hidden gold mine," Craighead said. "We continue to innovate in that space...I think that's going to be another opportunity where technology is going to make a difference for our customer's lifting cost."
Older Wells Like People
Another advantage is the chemicals segment, and that business is only going to improve, he said. As North America's oil and gas wells "get older, it's like people getting older, they need drugs. These wells need chemicals...and our chemical expertise and our folks in that area are constantly innovating new flow assurance and items."
Baker recently converted its South Texas and Permian Basin drilling and completions fluid businesses to a distribution model, "which will not only allow us to retain product revenue, but will also take our products into new markets and increase our market share." Fine-tuning the business "with a surgical approach" improves returns all the way around.
"That's the same philosophical view we are taking as we consider a range of ownership models for our North America land pressure pumping business. While we continue to participate in this market, we are looking at models that will allow us to do so while mitigating the resource requirements and capital intensity that are inherent in this particular business segment."
Baker plans to let "someone" manage, run and invest in the pressure pumping business, but Craighead did not disclose whether the unit would be integrated into the company, sold or split off. He made clear that the capital intensity required to keep pressure pumping a priority was not an advantage.
"We'll keep a relationship, but since that business is moved to the form that it is, which is really water and sand, it's become a horsepower and logistics game."
Quarterly losses widened on charges related to the cost reduction efforts, pricing pressures and weak demand. Losses totaled $429 million (minus $1.00/share) in 3Q2016, versus a year-ago loss of $159 million (minus 36 cents).
Excluding restructuring-related charges, writedowns and other items, adjusted losses were 15 cents/share, versus a loss of 5 cents a year ago. North American revenue declined by almost half to $674 million from $1.37 billion, but it increased 1% sequentially.
A slight activity increase in the U.S. onshore and a seasonal uplift in Canada were offset by a steep decline in activity in the Gulf of Mexico (GOM). Total revenue fell by 38% year/year to $2.35 billion and declined 2% sequentially. Cash flow was $119 million, down $3.5 billion sequentially and $309 million year/year.
During the quarter Baker exceeded its original cost reduction goal for year-end of $500 million at $600 million, and it has set a revised annualized cost savings target of $650 million.
"Looking ahead, in the fourth quarter of 2016 we expect activity in North America to modestly increase, as our customer community slowly begins to ramp up activity in what remains a tough pricing environment," Craighead said.
"While we expect the market conditions to remain challenging near term, the structural changes we implemented in the past six months have created a stronger foundation for delivering on our objectives and positioning the company for growth."
For the GOM, it's going to take a longer time to come back.
Baker's customers, particularly the international oil companies, "are still struggling with cash flow issues. We have a significant operator there that told us recently that the word from headquarters is 'you're going to deploy your capital to some better opportunities, one international and one on land. 'And if you look at the 17 rigs or whatever drilling rigs that are out there today, I think 10, at most, have a contract to go beyond Q22017…
“Beyond Q22017, I've got six or seven rigs that I don't have visibility to. So I don't see the Gulf of Mexico getting better until probably mid-2017."