Current BHI Stock Info

But BHI Chairman Predicts “Continued Uncertainty” in Global Oil Markets

Before the markets opened today, Baker Hughes (ticker: BHI) hosted the company’s second quarter conference call. BHI reported an adjusted net loss of $0.90 per share, with revenue falling 39.3% year over year to $2.41 billion.

Baker Hughes said it was hurt by a “continued steep decline” in drilling activity and pricing, and does not expect drilling activity in North America to meaningfully increase in the second half of the year. Martin Craighead, Chairman and CEO of Baker Hughes, said, “Our performance in the quarter was impacted by continued reductions in customer spending and activity, trends driven not only by the price of oil, but the volatility of those prices and the lack of clarity on the future.”

The recent volatility in oil prices has been influenced by many factors. Analysts are reviewing storage reports closely, U.S. production levels have been highly scrutinized, and supply outages have been credited for increases in oil price.

Craighead believes the volatility has not been driven by fundamentals, “In looking back over the past few months, it’s clear to me that the movement of oil prices has been driven more by one-off events such as temporary supply disruptions and not by a change in the fundamentals underpinning supply and demand. Therefore, I believe the industry will remain in a period of continued uncertainty at least through the end of this year.”

The prolonged volatility and uncertainty for the remainder of 2016 will create a prolonged period of indecision from companies looking for the market to dictate if wells are drilled or not.



“As we said in early May, we don’t expect to see a meaningful recovery in the second half of the year, and that’s still the case. While we’ve seen production edge down, particularly in North America, that has been offset by additional production elsewhere. I’ve yet to see an economic catalyst that will create a step change to demand, that would lead to materially higher oil prices. In addition, U.S. crude storage levels are at record highs and there is a significant backlog of crude in the form of drilled, but uncompleted, or so-called DUC wells.

“On the demand side, growth is only forecasted to be modestly higher than expectations at the beginning of the year. In fact, the economic impact of recent events such as the Brexit vote leading to a stronger dollar and significantly weaker British pound has created more uncertainty and historically there’s been a strong correlation between a strengthening dollar and a weakening oil price, which could continue to be an unfavorable headwind.”

What Will it Take to Increase Activity?

In recent rig activity reports from Baker Hughes, the industry has seen a slight increase in rig count in the U.S. and in North America as a whole. However, the recent activity may be a slight head fake in terms of industry intentions. Baker Hughes doesn’t see activity returning to the oil fields in full force until prices make a notable improvement.

“Many of our customers that I speak to are standing pat at today’s oil prices. And yes, many say they will ramp activity as oil prices reach the $50 mark. However, like in past cycles, service sector costs will rise with increased activity and that will erode incremental cash margins for the operators. Accordingly, I believe oil prices in the upper $50s at a minimum are required for sustainable recovery in North America.

“As we mentioned previously, in North America, we expect an initial increase in activity in the drilled, but uncompleted category, which today extends beyond 5,000 wells across the various basins. While completion schedules for these wells are estimated to ramp up as oil prices recover, the pace and speed of the increase will vary widely across the available inventory based on the well’s economics. A large number of DUCs are not economical at $50 oil prices. And I just would feel a lot more confident that we see some stability well north of $55 before there is a lot of motivation for us to be bringing back capital into North America.”

Wells that sit idle in the DUC phase are a major unknown. The economics of a DUC well differ slightly due to the cost of drilling the well having been realized. If companies decide to complete DUC wells instead of new wells, this would limit the need for drilling rigs and leave the rig count largely unchanged.

While obstacles remain in place that would deter the rig count from rising to pre-OPEC induced crash levels, Baker Hughes believes the rig count will slowly begin to rise in the latter half of the year. “Despite a backlog of drilled but uncompleted wells to work through, we expect the North American rig count to increase modestly in the second half of 2016 driven by seasonal gains in Canada and a slight uptick in the U.S. market. I describe it as a slow grind upwards for North America. Internationally, we expect rig counts to continue slight declines in most countries for the second half of 2016.”

International and Offshore Outlook

North America is not the only region feeling the pain. Other countries around the globe have been hurting from low commodity prices as well. The market outlook for the rest of the globe varies depending upon the circumstances in that area.

Industry Needs Minimum of Upper $50s for Sustainable Recovery: BHI

“It’s not a one-size-fits-all outlook. There are pockets of stability mixed with pockets of declines,” Craighead said. “Markets in the Middle East and Russia Caspian are expected to be more resilient and may experience modest growth. The leading drilling and completions positions that we’ve built in these markets are likely to see the first surge in activity on the well construction side as conventional markets with lower lifting costs are the first to recover.”

Offshore activity has been hindered by the low prices, and oil producers in offshore fields have been hit hard given the higher costs of doing business in the deepwater areas. Baker Hughes believes offshore activity will continue to wane.

“We expect deepwater activity to continue to decline; however, when this segment recovers, which we fully expect, we are well-positioned with a substantial footprint in deepwater markets such as the Gulf of Mexico, Brazil, North Sea and West Africa, with leading positions in drilling and completion services.”

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