Driven by sustained intensity in the U.S. onshore and a slow recovery in the Gulf of Mexico (GOM), the domestic rig count should average 1,850 in 2011, which would be 20% higher than in 2010, Baker Hughes Inc. said Monday.

In Canada the rig count is expected to hit 400 this year, which would be 15% higher year/year (y/y), CEO Chad Deaton said during a conference call with energy analysts.

The Houston-based oilfield services provider posted better-than-expected 2Q2011 earnings, with net profits of $338 million (77 cents/share) up from $93 million (23 cents) a year earlier. Excluding charges the company earned 93 cents/share, which was 2 cents higher than average Wall Street forecasts. Revenue in the latest period jumped 41% to $4.74 billion. North American revenue in the latest quarter jumped 37% year/year (y/y) and was up 1% sequentially.

North America revenue jumped 37% y/y and 1% sequentially to total $2.36 billion in the latest period. Profit margins were up 19% from the year-ago period. Canada’s spring ice break-up, which leads to a slowdown in drilling activity, “provided some headwinds” but “fundamentals are strong” across North America, said Deaton.

“We remain confident in the underlying strength of the U.S. market and we’re encouraged by the ever-increasing number of unconventional plays our customers are asking us to help them exploit,” Deaton said. “We maintained superior margins in North America throughout the cycle…

“In the Gulf of Mexico the deepwater remains a work in progress for all of us,” he said of the industry. “There is a lighter amount of permits than we had hoped for but like our customers we continue to be committed to this very important basin…

“The deep gas on the [Outer Continental] Shelf continues to be a bright spot.” As work continues to ramp up in the offshore Baker Hughes is “readying to be fully compliant” with the additional restrictions imposed, Deaton explained.

Baker Hughes is currently “underrepresented” on the rigs that have gone back to work in the GOM but it expects to perform better there in the second half of the year, COO Martin Craighead said.

“As operators get back to work in the Gulf, it will be slow to recover. We are making investments to provide best-in-class services for our customers and to help protect our people. These costs had a modest impact on 2Q2011 but we plan to capture those costs over time and receive value from the enhanced services.”

Baker Hughes’ GOM revenue in the latest quarter declined by more than 50% from 2Q2010, said CFO Peter Ragauss. However, he said the company should capture about two-thirds of its business back in 3Q2011, which would strengthen again in the final period of this year.

“It all starts with permits and permitting,” said Deaton of the GOM. “We were at 21 rigs in 2Q2011, 24 rigs in 3Q2011 and we’ll see more clarity in 4Q2011, subject to getting permits on all of them. We know the rigs we are getting in 3Q2011, and we’re in a nice position in 4Q2011.

“In a sense, this thing is kind of ramping up fairly slowly but we are getting equipment built, [getting] all of our people back that were assigned to deepwater offshore. They are now all back in place.”

Craighead noted that the GOM will continue to see a ramp-up over the next two years.

“There are 130 or so well locations in the Lower Tertiary [of the deepwater GOM] in the next several years,” he explained. “There’s going to be enormous spending and key customers are committed to it…The amount of customers that are working on complex completions to 2013, given the type of technology required, is at a record pace, actually.”

Deepwater drilling takes more planning, he explained. “The work is being done to prepare for it and preparing for this stuff at a much higher standard is under way…We’re optimistic and confident that it will follow through…”

The last three months of this year are “going to be big for us in the Gulf of Mexico,” said Deaton. “In the last quarter clients started to line up for work that was awarded four months ago.”

Craighead said the GOM work is “all over the map. We’re in customer offices now with contracts awarded. Planning is well under way for wells that won’t spud until 2013. It’s incredible.” The deepwater wells have more intense “technology requirements, thought leadership. It’s hard to generalize. From an award to actual work it might be six months.”

In North America’s onshore, there is a “widening disconnect” between the number of rigs drilling and the services needed to complete them, said the COO. Because of the disconnect, it’s difficult to forecast how many rigs are needed, he explained.

“The near-term supply is not only in pressure pumping” but other drilling services, Craighead explained. This “service intensity per rig is driven by three forces,” which are rigs that are more efficient, horizontal drilling techniques that continue to improve, and hydraulic fracturing (fracturing) techniques that continue to be optimized.

“Since the start of 2010 we’ve seen a 30% increase in the number of stages fracked per well,” he said. “And we’ve seen a 40% increase in frack technology. This dynamic change has led to a widening disconnect between the rig count and revenue per growth…Today we’re generating revenue beyond what the rig count would historically suggest by pushing new technologies…and better well construction techniques have led to longer laterals…”

Baker Hughes secured $400 million in new multi-service contracts during the latest quarter, Craighead told analysts. The company continues to launch more efficient drilling technology but “the longer laterals cannot continue indefinitely.” However, “we haven’t seen the end of possibilities in the marketplace to become more efficient and provide reliable performance. These are game changers that only a few can do and Baker Hughes is one of them.”

More revenue is expected to be generated for Baker Hughes because the demand for oilfield services is exceeding the ability to provide them, said Deaton. Executives at Schlumberger Ltd. and Halliburton Co. last week made similar comments about the growing backlog for drilling completion services.

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