Baker Hughes (BHI) counts North America as its single largest market accounting for around half of the company’s total revenues. While the North American division has typically been the company’s most profitable geographic segment, it has seen some margin pressure of late. According to our estimates, the division’s EBITDA margins fell from around 28% in 2011 to around 19% in 2012 due to a challenging market for pressure pumping services. However, we believe that margins could look up this year given some positive trends in the pressure pumping space as well as stronger activity in the U.S. Gulf of Mexico.
Pressure Pumping Utilization Is Improving But Pricing Is Still A Challenge
Pressure pumping, a service largely used to perform fracking of shale gas wells, is one of Baker Hughes’ most important product lines in North America. The market for pumping services has been weighed down in recent times as low natural gas prices and oversupply of pumping horsepower impacted the market. While Baker Hughes’ pumping business saw significant headwinds last year, things began to look up during the first two quarters of this year as the company saw stronger utilization rates across its fracking fleet. Although the pricing for fracking services continued to decline over the first half of this year, the firm has indicated that prices could stabilize going forward.
Baker Hughes has been focusing on improving its operational efficiencies to cut costs and bolster margins for its pumping product line. For instance, the company has been carrying out more 24-hour frac jobs, which should aid its utilization rates and help reduce costs. The firm has also been transitioning some of its fracking trucks to operate on both natural gas as well as diesel. In addition to being cheaper to run compared to diesel, natural gas powered pumps can be operated for longer periods of time and have lower maintenance costs. Since the company derives nearly 25% of its total revenues from the pressure pumping product line, we believe that these improvements could have a positive effect on the North American margins going forward.
U.S. Gulf Of Mexico Will Bolster Margins
The U.S. Gulf of Mexico has proved to be a bright spot for most large oilfield services companies in the recent past, and Baker Hughes is no different. The firm mentioned that its revenues from the region touched historical highs during Q2 2013. At the end of August, the number of offshore rigs in the Gulf rose to around 61, an increase of nearly 25% year-over-year. Additionally, there has been a shift from exploratory drilling to development drilling in the Gulf in recent times. and this move is likely to help Baker Hughes’ completion and production product segment going forward. The company’s offshore stimulation operations have also been seeing strong activity, with the firm recently adding its third stimulation vessel in the region.
Disclosure: No positions.