Baker Hughes Sees Bright Future

By Eric Fox | April 04, 2011 AAA

Baker Hughes (NYSE:BHI) provided a positive operating and financial outlook for the company at an analyst meeting held in March 2011. The company also discussed the macro trends underpinning future growth in demand for oil services.
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Macro Trends
The underlying trends that Baker Hughes believes will support future growth in demand for oil services are familiar to most investors. The company sees higher levels of capital expenditures needed over the next few decades to discover and provide enough oil and natural gas to meet future demand from the emerging economies.

These future sources of energy are increasingly located in difficult areas of the world like the deepwater, and require greater expertise from the oil service industry. In North America, development capital is flowing towards shale and other unconventional resource areas, where wells have higher service intensity leading to increased revenues for the industry.

U.S. Land
Baker Hughes sees a strong growth in demand from customers in the onshore part of the United States. This area has seen a shift over the last few years from natural gas to oil and liquids development. The exploration and production industry has also targeted development towards shale and other unconventional formations where wells require horizontal drilling and hydraulic fracturing.

This increased service intensity is seen in a recent well that the company worked on for Whiting Petroleum (NYSE:WLL) in the Williston Basin. Baker Hughes completed the well with a 40 stage hydraulic fracturing operation, a record for the industry.

The increased service intensity has led to a shortage of fracturing capacity, and Baker Hughes estimates that this shortage will last until the end of 2012. The market will then have a rough balance between supply and demand.

International Margins
Baker Hughes also used its analyst day to reassure investors that the company was still on track to reach its goal of increasing margins in its international segment. The company expects to achieve an operating margin of 15% by the end of 2011. The company plans to reach this goal through revenue growth, expense control and operational efficiency.

One method that Baker Hughes is employing to increase efficiency is to hire local employees in overseas locations. Over the last five years, the company has increased its local employment content in many countries where it conducts business.

Baker Hughes reported operating margins ranging from 8% to 10% in its international business in the final quarter of 2010. This was far below operating margins in North America which came in at 22% for the quarter.

Schlumberger (NYSE:SLB) reported operating margins ranging from 16% to 29% in its international segments in the final quarter of 2010. Halliburton (NYSE:HAL) also has higher international margins with the last quarter of 2010 reported at 16.2%.

Bottom Line
Baker Hughes reviewed the strong industry trends that the company believes will support future growth in demand for oil services over the next decade. The company also provided a positive outlook on its operations and finances in 2011. (For related reading, take a look at Gold Or Oil: Which Is The Hotter Investment?)

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