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Baker Hughes: 2013 North American Rig Count to Decline 5%
Baker Hughes Inc.’s North American activity is predicted to be steady this year compared with 2012, but customers still remain cautious about what’s ahead, CEO Martin Craighead said Wednesday. Canadian projects also are posing “near-term risks,” he said.
Speaking to analysts during a quarterly earnings call, Craighead and his management team explained why U.S. and Canadian activity continues to fall, as it did in 2012, while international business is picking up. It’s all about commodity prices and rig efficiencies, he said.
“At current commodity prices, we expect activity to remain stable this year and as our customers keep a cautious outlook,” said the CEO. “We predict that the average North American rig count will be down compared to last year. However, this decline will be partially offset by continued gains in rig efficiencies that can be attributed to increased pad drilling, a more modernized rig fleet and a continued absorption of new drilling completions and production technologies that we are bringing to the market.”
Baker’s surplus capacity translated into 125 pressure pumping fleets across North America that now are idle or underused, he said.
“All else being equal, the U.S. would need at least 300 additional drilling rigs to come back online in order to get those idle fleets fully up and utilized,” he said. However, there appears to be little relief in sight for the land services operations.
The “headwinds on pricing” in North America are “not over yet, and it’s going to be a drag on the overall North America margin for all of ’13, easily,” he told analysts.
Net income fell in 4Q2012 to $211 million (48 cents/share) from year-ago profits of $331 million (76 cents). Adjusted quarterly profits were 62 cents/share, 1 cent higher than average forecasts. Revenue was down slightly at $5.22 billion, with close to half of it from North America. Baker had warned in December that quarterly margins and revenue would be below expectations.
North American revenue in 4Q2012 was $2.6 billion, down $183 million, or 7% sequentially. North America operating profit was $222 million, down around $99 million sequentially. Profit margin was 8.7%, in line with recent guidance.
Year/year, U.S. rig efficiencies improved in 2012 by about 15%, Craighead noted.
“This year, we project roughly another 10% increase in wells per rig compared to 2012. In addition to rig efficiencies, our customers will focus increasingly on production enhancement. For example, in the past, the drilling and completion design of a well was defined by the reservoir, while artificial lift consideration was usually dealt with years later. Today, Baker Hughes is working with U.S. customers to engineer artificial lift solutions during the well planning stages, and by planning for production enhancement techniques upfront, we’re helping our customers improve ultimate recovery.”
Baker, which is the standard bearer for global oil and natural gas rig counts, is projecting the North American rig count in 2013 to “decline by 5% or 125 rigs compared to 2012,” said CFO Peter Ragauss. “In the U.S., relative to the 4Q2012 exit rate of 1,763 rigs, we anticipate that the rig count will be flat during the first quarter of 2013 and then modestly rebound throughout the remainder of the year to a final 2013 exit rate of 1,880 rigs, comprised of approximately 1,420 oil rigs and 460 gas rigs.
“On average, compared to 2012, expect the annual U.S. rig count to decline by 5% this year. The U.S. rig count includes offshore rigs, which are expected to increase 8% to 52 rigs in 2013. This includes an increase of four deepwater rigs compared to 2012.”
Canada’s 1Q2013 rig count is expected to “sequentially improve 38% from 4Q2012 to average 511 rigs, said the CFO. “This would be 13% below the average from the first quarter of 2012. Canadian rig counts in the second half of the year are currently forecast to be similar to the second half of 2012, resulting in an average annual rig count decline of 8% in 2013.”
North America’s industrial services activity “should remain stable with margins ranging between 10% and 12%,” said Ragauss. North America is Baker’s biggest business segment.
“Our North America operational performance can be summarized into four main points,” said the CFO. “First, in the U.S. and Canada, the pressure pumping product line continued to face margin pressure with further pricing degradation. These unfavorable price conditions were partially offset by a sequential reduction in our guar [gum] costs and continued improvements in our efficiency.
“Second, some of our other U.S. product lines experienced a reduction in activity as rig counts declined sharply toward the end of the quarter due to customers shutting down early for the holiday period. However, activity levels for our production product lines remained strong…In Canada, our operations were also significantly impacted by one major customer [that] shut down all of their Canadian drilling and completion operations during the quarter. And fourth, the Gulf of Mexico continued to perform well, as deepwater activity levels continued to increase.
A lot of Canadian customers “continue to deal with constrained cash flows from low natural gas prices and an abundance of projects that are marginally profitable,” Craighead noted. Meanwhile U.S. shale oil production, “coupled with decreasing consumption and limited refining and pipeline capacity, is increasing differentials for heavy oil close to $40/bbl.
“Considering that break-even prices for new heavy oil projects can be as high as $65/bbl, we believe that some of these projects in Canada are at near-term risk. Given this, Canadian customers are focused squarely on conserving cash and increasing returns on capital. And until industry fundamentals change — and the biggest driver to that is improvement and takeaway capacity — Canadian activity will remain challenged.”
At the beginning of 2012 about 20% of Baker’s U.S. fleets were working 24-hour shifts, noted the CEO. Today the company has “nearly doubled that. We’ve lowered costs by improving our supply chain and moving our infrastructure closer to the centers of activity.”
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