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'Tidal Wave Shift' to Permian, Says Baker Hughes CEO

Baker Hughes Inc. CEO Martin Craighead said Tuesday the company sees a big expansion of oilfield services ahead in the Permian Basin, of late the mecca for operators looking for liquids-rich reserves in the old guard oil and gas formations.

Craighead spoke with financial analysts about the company's 1Q2012 operational performance during a conference call. Like competitors Schlumberger Ltd. and Halliburton Co., which in recent days have reported pressure pumping issues in the North American onshore, Baker also is feeling some constraints. But the CEO said there also is a plethora of opportunities.

"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 is a market where Baker Hughes is particularly strong, especially our pressure pumping business...So we are well-positioned to benefit from this opportunity."

Baker is "excelling in the liquids-driven market" as producers shift their talents from gas targets. The Permian Basin "is the next important basin, where we believe new opportunities will continue to evolve," said Craighead.

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."

Baker, which has provided worldwide rig count tallies since 1994 as a yardstick to track drilling activity in the onshore and offshore, is forecasting that the full-year 2012 North American rig count will grow by 5% to average 2,400 oil and gas rigs this year, said CFO Peter Ragauss, who shared a microphone with Craighead.

"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. However, the mix of natural gas versus oil has changed drastically," Ragauss said. "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."

The total U.S. rig count on Friday (April 20) was 1,972, significantly higher than the year-ago level of 1,800, according to Baker. Last week the number of rigs engaged in land operations climbed by 19 to 1,904, inland waters activity rose by one to 23, while offshore drilling was up by two to 45. The U.S. gas rig count ended last week up seven from the week before at 631, but it was down by about one-third from its 2011 peak of 936 rigs, reached in mid-October. In the year-ago period 878 U.S. gas rigs were in operation.

The U.S. and Canadian onshore pressure pumping market is constrained, and may be into 2013.

"The 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," he said during the conference call. "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, said the CEO.

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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