Baker Hughes 2Q16 Earnings Call Notes

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Baker Hughes’ (BHI) CEO Martin Craighead on Q2 2016 Results

The industry will remain in continued uncertainty until there are more foundational changes to supply and demand

“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 changing 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 until more foundational changes to supply and demand create a more stable environment for our customers to plan against.”

We don’t expect to see a meaningful recovery in the second half of the year

“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. While our customers have substantially slowed, reduced, or all together canceled a large number of exploratory and field development campaigns, 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.”

Demand growth is only modestly higher than expectations at the beginning of the year

“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.”

Many customers are planning to ramp activity at $50 but oil prices in upper $50s are required for a sustainable recovery

“Many of our customers, 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.”

Expect rig count to increase modestly in 2H16

“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.”