Baker Hughes Struggles To Define Itself

| About: Baker Hughes, (BHGE)

Transitions are hard, especially big ones. They're even more challenging when they require moving away from something that has, by most accounts, enjoyed success.

Such is the story with Baker Hughes (BHI). It's been over three years since the company embarked on its high-profile effort to transform from a relatively decentralized provider of oilfield products and services to one determined to compete via an expanded and deeper global footprint and more integrated suite of products and services. To date, the promise of this strategy has yet to fully materialize.

We were skeptical at the time it was the right decision to move away from the Baker Hughes as it existed, if only because the company possessed customer satisfaction ratings in EnergyPoint's independent customer satisfaction surveys that were very competitive with those of the major peers it was targeting with the new strategy -- namely Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), and to a lesser extent Weatherford International (NYSE:WFT).

Since the strategy was announced in 2009, Baker Hughes' overall customer satisfaction has fallen 8.9% on an adjusted basis. This compares to an average decline of 2.5% for its major peers.

Nonetheless, the company still posts Average ratings in the majority of the attributes and categories we track, although job quality, post-sale support, and pricing and contract terms all currently rate as Low. We note its Low rating in international markets as well. The steady multi-year drift lower in customer satisfaction has shown signs of bottoming as of late, however, with most categories now flashing Stable.

One headwind for the company has been the reaction to the change in its culture over the last several years. Many customers and employees bemoan the loss of performance at the individual level. Claims of too much analysis and too little execution linger. A plethora of competing initiatives, along with inconsistent implementation, haven't helped. New and old employees alike seem confused as to the company's priorities.

Strategic miscalculations are also apparent. Emphasis on market share has led to a push into new international markets without clear signals from customers, at least that we could see, of the impending reward for doing so. And its acquisition of BJ Service has probably not added as much to either its competitiveness or financial results as was originally hoped.

The company also reorganized around geographic markets, away from a product- and service-line orientation. This step seemed to encourage greater bundling and packaging of offerings, an approach studies by EnergyPoint and others suggest typically leads to diminished customer experiences.

The strategies, offerings and capabilities of the industry's larger suppliers are now so strikingly similar that their customer ratings have effectively converged. Certain suppliers' efforts to fit in have, in effect, made it substantially more difficult, maybe even impossible, for them to stand out. The upshot: customers are now able to more effectively push on pricing as the final differentiator.

Is a return to Baker Hughes' roots in order? Our survey results show its greatest competitive advantages still lie in products such as drill bits, packers and downhole motors. Likewise, its strong ratings in perforating and fishing services stem, at least in part, from the quality of in-house products used in providing the services.

To the extent Baker Hughes seeks more firm footing on what has proven a slippery slope, it would likely do well to re-emphasize what it does best in the eyes of customers. The company unquestionably has a long-held reputation for quality downhole tools and equipment to build upon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: My firm, EnergyPoint Research, does and/or seeks to provide for-fee data subscriptions to oil and gas industry participants and stakeholders, including companies covered in its posts, reports and articles.

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Tagged: , Oil & Gas Equipment & Services
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