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'Little Chance' Seen for Drilling Recovery in '09

Baker Hughes Inc. (BHI) last week said energy industry spending and drilling activity is contracting in North America as its customers adapt to a market "characterized by lower natural gas and oil prices, scarce commercial credit, ample natural gas supplies and reduced natural gas demand." The pace of activity contraction, as measured by the rig count, has been faster than any other cyclical contraction post-1986, according to the oil services contractor.

"Our first quarter results for North America reflect the severe contraction in customer spending and activity," said CEO Chad C. Deaton. "Profit from North America operations was impacted by significantly lower activity levels, severance charges and price deterioration." Since the beginning of this year BHI has cut about 3,000 jobs worldwide.

"Looking forward, the fundamentals that drive our outlook are essentially unchanged," Deaton said. "We expect customer activity in North America to continue to decline, and see little chance of a recovery before the end of the year. Internationally, oil prices and the strength of the global economy remain the most critical factors for determining international spending and activity."

During a conference call last Wednesday, Deaton said BHI is forecasting more weakness in North American drilling as advanced technology improves domestic gas production.

"The industry may be able to sustain production with far less rigs," Deaton said. Ample gas supplies could suppress North American gas drilling "for several quarters."

Last month Halliburton reported that steep declines in North American drilling activity, especially in the Rocky Mountains, Permian Basin and Midcontinent, depressed earnings and forced a 12% reduction to its North American workforce (see NGI, April 27). Schlumberger Ltd.'s profits were down 28% in the quarter.

The North American gas/oil rig count, which stood at around 1,020 in late April, is forecast to average around 950 rigs in 2Q2009 based on BHI's projections, said Deaton. Internationally more oil projects will move forward only if prices rebound to around $70/bbl, he said. "If oil prices continue to trade near the $50 range, we'll continue to see a slow decline in international activity."

To reduce North American operating costs, BHI has undertaken "workforce reductions, facility consolidations and other cost control measures," said the CEO. "Our financial strength allows us to continue our program of expanding our international infrastructure. Baker Hughes will exit this cycle as a stronger competitor, so we are continuing our investment in infrastructure, research and development, and training."

BHI's North American completion and production (C&P) segment revenue increased 8% in 1Q2009 from a year ago, but its drilling and evaluation (D&E) product line segment revenue plunged 24%, as its North America rig count decreased 27%. C&P segment revenue fell 15% sequentially in 1Q2009 from 4Q2008; D&E dropped 33%. From the last three months of 2008 through the first three months of 2009, BHI said its North America rig count slumped 28%.

The Houston-based company said 1Q2009 net income was $195 million (63 cents/share), down from $395 million ($1.27) a year earlier. Revenue was flat at $2.67 billion.

Baker Hughes, which has cut about 3,000 jobs in two rounds of layoffs this year, said net income was hit by about $54 million in pretax costs associated with employee severance. The company also said it set aside $29 million as an allowance for "doubtful accounts."

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