No matter how volatile the global political scenario becomes for oil and gas markets, North America will remain in a more solid position because the unconventionals have provided operators with predictability that can’t be found anywhere else in the world, Baker Hughes Inc.’s CEO said Thursday.
Baker, the world’s third-largest oilfield services operator, was the first of the Big Three to issue its 3Q2014 earnings results; Schlumberger Ltd. and Halliburton Co. are to follow in the next two business days. CEO Martin Craighead spent close to an hour discussing North American markets, and how the unconventional turnaround has impacted the producers and Baker services. National oil companies still call the shots in most parts of the globe, but increasingly, they are calling those shots in North American fields instead of far-flung, dangerous destinations.
“We are all going to be in a much better position as far as North America is concerned no matter what the global scenario is because the unconventionals provide us with a better level of predictability for our customers, both in terms of costs per well, which are going down because we are more into this industrialization, if you will, and the geological risk of these wells is less than it what it’s been through previous cycles.
“North American land will probably be a lot more resilient” for a number of reasons, not least of which it’s where the technology begins, and it’s where the best values can be found, he said.
Baker’s net income in 3Q2014 was higher year/year at $375 million (86 cents/share) from $341 million (77 cents). Revenue rose to $6.25 billion from $5.94 billion. Free cash flow hit $725 million, a record for the company.
The gains came “despite several geopolitical events in the Eastern Hemisphere and a sharp reduction of activity in the Gulf of Mexico, which caused margins to fall short of our expectations,” said Craighead. “Our outlook for the near-term remains positive, based on increasingly favorable market conditions in our North American business and recent actions to increase profitability internationally.”
North American revenue growth in the quarter was driven by a big increase in “service intensity” in the pressure pumping product line and a seasonal rebound in Canada. At the same time, however, customers experienced delays in the Gulf of Mexico from strong currents that forced eight rigs to shutter activities. The combination caused Baker’s North American margins to be flat from a year ago.
Baker had set a North America target to reach 15% margins by the end of the year. With the turmoil in the GOM, he was asked if that was still doable.
“It’s not going to be a walk in the park,” said the CEO. “The Gulf of Mexico issue with the currents was certainly unexpected in the third quarter…We have never seen them as strong, and the duration of them, as far as I can tell, is unprecedented. Going into 4Q2014, we need some help there, if you will, from Mother Nature that the Gulf comes back.” However, projects in the offshore weren’t canceled, just delayed.
The backlog of projects into the fourth quarter will lead to “an extremely robust, almost maniac level of activity” in the offshore.
In the U.S. onshore pressure pumping market, there’s no sign of a slowdown either.
Laterals are longer, multiple stages and multi-pad density are the norms, and “our customers are not going to pump less,” Craighead said. The company’s pressure pumping per stage was up 22% sequentially in the third quarter.
“That is going to continue…There may be a slow down of it” on holidays or weather delays, but overall, everything appears positive. In addition, there’s the “continued absorption of some new technology. I don’t want to say it’s going to be easy, it’s not” to reach 15% margin. “But I’m very confident we will deliver on that number.”
In a sign of how strong the North American onshore drilling market is, Baker activated its final hot stack equipment during the third quarter and there’s only cold stack equipment left, Craighead said. “There’s nothing that can be put back into operations that won’t be a newbuild, certainly by the end of this fourth quarter.”
The volatile oil prices don’t appear to be a deterrent to Baker’s U.S. customers, said the CEO.
“Our customers right now are in the throes of trying to determine what their budgets are going to be for 2015, and I can tell you that channel checks I do with my peer customers are that they’re concerned with what is going on in the oil markets, but they are not at this stage…giving [prices] a whole lot of credibility either that these numbers are what we are going to see in terms of commodity prices.”
There could be a “few” customers that are more dependent on borrowing or that may have a “less attractive subsurface position” that could be sidelined by lower oil pricing, but “I don’t see that being material for us, and I’m not projecting that anytime soon.”
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