Over the past couple of months companies in the oil services sector (OIH) have had a noticeable price decline. Baker Hughes (BHI) share price has declined just under 10% from its highs just before Halloween. There are some of the reasons for this seasonal disruption but the overall trend still remains bullish. Is this an excellent time to pick up shares in Baker Hughes? I believe it is.
Baker Hughes Inc., operates in the oilfield services industry. It provides products and services for drilling and evaluation of oil and gas wells; completion and production of oil and gas wells; fluids and chemicals and reservoir technology.
Why the Buying Opportunity?
Currently there are a some factors putting pressure on the stock price. On a domestic front the North American onshore market has a "glut" of supplies. On an International front there have been some issues in Iraq while on a global front volatility in oil prices have all added up to a price reduction in Baker Hughes' stock.
On the domestic front Baker Hughes North American operations including its pressure pumping line are experiencing downward pricing pressure. This downward pricing pressure is due to the overall North American utilization rate being oversupplied by ~20%.
In a recent statement, Halliburton (HAL) CEO Dave Lesar stated:
"The North American market continues to have excess supply of pressure pumping equipment, and although this is improving, we anticipate pricing pressure will continue as contracts review during the next quarter or so."
On the International front, protests in Basra Iraq early in November prompted the U.S. oilfield services company to stop work at the Rumaila field. Because of this shutdown Analysts note the company has a dozen rigs in the country which likely contributes 1%-2% of total revenue, so there will be an impact of ~$80 million.
On a global front, another reason for the current price volatility is the decline in oil prices this fall. As the price of oil has shown some weakness so has Baker Hughes' stock price.
In the three-year chart above, you can see the correlation between iPath S&P Crude Oil Total Return Index ETN (OIL) and Baker Hughes' share price. As the price of oil has displayed weakness over the past few months Baker Hughes stock price was soon to follow.
All the factors listed above have created a stock price decline of ~10% in the past couple of months.
Adding to the reasons listed above, a 20-year seasonal average supplied by equity clock indicates the fall months tend to be the weaker months for Baker Hughes.
Catalysts for Continued Growth
1. Deep-water Drilling Market
Even though Baker Hughes has many revenue streams, increased E&P spending in the deep-water and ultra-deepwater regions around the world will be a key driver for future growth in revenue, earnings and the stock price.
Deep-water and ultra-deepwater exploration and drilling have shown a remarkable increase over the past few years. This is due in part to the development of new technologies, which have reduced operational costs and increased safety. These technological advancements have also increased a company's ability to find and access more reservoirs that will produce high-quality production wells.
Baker Hughes, which is a leader in the development of new technologies for deep-water drilling, has pushed the envelope with its engineering and technological advancements. Many of these advancements have opened up a greater amount of opportunities in areas such as the Pre-Salt region off the coast of Brazil, the Barents Sea in Norway, the U.S. Gulf of Mexico and Africa.
As more advanced technologies have created opportunities, that in turn has reduced costs and increased safety, it has become economical for companies to pursue deep-water reserves. Major E&P companies such as Exxon (XOM), Chevron (CVX), BP p.l.c. (BP) and Royal Dutch Shell (RDS.A) (RDS.B) have increased their presence in deep-water regions. Exxon is expecting deep-water projects to account for 8% of its new source production over the next decade. Chevron is expecting deep-water projects to account for 40% of its new source production. BP p.l.c. is banking on the most as it is expecting 52% of its new source production to be from deep-water reserves over the next 10 years, while Shell is more reserved in that it expects 25% of new source production to come from deep-water projects. To support their deep-water growth, these major E&P companies along with others have significantly increased their deep-water Capex spending outlook over the next four years.
Over the next four years, It is estimated that global growth in the offshore E&P sector will increase 8% to 10% YOY. Leading the way in E&P spending is Brazil, which is anticipating $250 billion to be spent on the development of its offshore reserves. Second in E&P spending is Norway, which is expecting $220 billion to be spent on the development of the North Sea, Norwegian Sea and the Barents Sea. The region that Schlumberger is focusing on is the U.S. Gulf of Mexico. Within the U.S. Gulf of Mexico, E&P spending is expected to be around $190 billion over the next four years.
2. North American Drilling Market / Technological Improvements
Even though the North American pressure pumping (fracking) market has suffered as service companies brought a glut of supply on board, the long-term outlook is positive as the U.S. is focusing on becoming self-sufficient in energy by 2030. As the U.S. is looking at tight oil and shale gas as a one of the main sources for its oil and gas production this increased production will absorb the current glut of equipment in the market.
According to the EIA the U.S. has plenty of oil and gas reserves. They estimate at current consumption rates, the U.S. alone has around 92 years of technically recoverable natural gas reserves. Technically recoverable reserves consist of "proved reserves" and "unproved resources." As the U.S. has enough oil and gas to sustain itself for many years, this will open the door for many investment opportunities.
To capitalize on these opportunities Baker Hughes has created ways to speed up the fracking process. To speed up fracking process, Baker Hughes has developed disintegrating balls or IN-Tallic disintegrating frac balls. They are dropped down to plug the well at various stages and isolate different zones for fracking.
"When compared to cementing with plug-and-perf operations, this method can deliver significant time and cost savings for operators," Mr Wood said. "Along with directly targeting the optimum places to fracture, we're getting more sleeves and hundreds of connections to the reservoir with fewer balls, which have the added feature of disintegrating with time."
Share Holder Value
According to Baker Hughes Q4 guidance Baker Hughes recently announced it had repurchased about 6.3 million shares of common stock totaling $350 million during the fourth quarter.
As Baker Hughes stock price has declined by close 10% in the last couple of month, the reasons for this decline are temporary. This temporary decline has provided an excellent opportunity to invest in a solid company with many forward catalysts. With Baker Hughes strong presence in North America coupled with the growing outlook for offshore deep-water development, it is my opinion this is an excellent time to purchase the stock.