Baker Hughes 3Q16 Earnings Call Notes

Baker Hughes (BHI) Q3 2016 Results

Martin S. Craighead – Baker Hughes, Inc.

Need oil prices in the mid 50s for a sustainable recovery

” As we said in July, and reiterated again in September, we continue to believe that oil prices in the mid to upper 50s are required for a sustainable recovery in North America. Our customers also need to be more confident on the durability of those oil prices before making any significant change to their spending patterns. As we previously projected, the North American market has been continuing to grind slowly upward and we expect that to continue. In order for a broader recovery to take place, a series of milestones need to be reached before the market can respond in a more predictable way.”

$65 needed in west Africa, $55 in North Sea

“We still have a very positive view on a dollar per barrel recovery cost. It makes all the sense in the world, but at these commodity prices, I think my customers in West Africa need about $65. I think it’s probably about $55 in the North Sea, and I think it’s about the same in the Gulf. And until we see that, as we’ve said before, you just have to have some period of stability for them to come back. The nice thing about that market, as you know, is the focus on technology, reliability, quality. That’s right up our alley, so we’re participating in managing our costs until that starts to recover.”

Gulf of Mexico probably wont recover until mid 2017

” I think that our customers, particularly our IOCs, are still struggling with cash flow issues. We have a significant operator there that told us recently the word from headquarters is you’re going to deploy your capital to some better opportunities, one international and one on land. And if you look at the 17 rigs or whatever drilling rigs that are out there today, I think 10 at most have a contract to go beyond Q2, the MODUs. Beyond Q2, I’ve got six or seven rigs that I don’t have visibility to. So I don’t see the Gulf of Mexico getting better until probably mid-2017.”

Baker Hughes 2Q16 Earnings Call Notes

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.”

Baker Hughes 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

seeing wells drilled but not completed

“The average U.S. rig count in the first quarter is projected to be approximately 15% lower than the fourth quarter average. Additionally, we are seeing a growing inventory of wells drilled but not completed as some customers are electing to delay completions and defer production.”

Down cycles happen once or twice a decade in this industry

“As Kimberly just mentioned our industry is clearly in the early stages of a down cycle. The same sort of cycle we enter once or twice a decade. As with past cycles, the early days are always marked with a high degree of uncertainty which customers will cut spending and by how much, how fast will rig counts drop and where and when we’re going to reach the bottom? And we don’t have precise answers to all these questions and no one frankly does, but we’ve been through this before and many times infact.”

rig counts typically fall sharply

“What we’ve learned in the past is that when the market turns down, it turns swiftly. In each of the last three downturns dating back to the nineties we seen North American rig counts fall between 40% and 60% in the space of only 12 months. International rigs don’t tend to fall sharply but begin to drop steadily a couple of months after the first signs of weakness appear in North America. ”

You can’t just hope that prices are going to go back to $100

“This industry can’t simply hope and wait for oil to climb back over $100 a barrel, instead we must adapt to a new reality of sustained lower commodity prices”

Some product lines will be more insulated

“in terms of some of other ones, such as artificial lift and chemicals, make up a significant part of our North American portfolio. You know, I fully expect those to be not fully insulated, but more insulated if you will.”

This downturn won’t be as severe as the last one because it’s a different market, no worldwide recession

” There’s no way we would expect the decrementals to be as severe as they were in that downturn you referenced. And partly, we think it’s a bit of a different market, Jud, you know that was a worldwide economic recession and we saw across the broad customers react and certainly this is setting up to be a tough one.”

This company has never been stronger

“this company has never been stronger, whether it’s the talent in place, whether it’s a portfolio, whether it’s the adherence to processes and controls, supply chain infrastructure, roofline whatever it is.

So, whatever the market will throw to us over the next couple of years and you’re right on, it’s a very difficult thing to predict. This company is very well positioned to perform better than I think as any time in its history.”

The workforce cuts are going to be different this time around because we’re a very different company than we have been

“As to the percentages, this gets back to the earlier discussion. We’re very, very different company in terms of completion. We’re more people intensive than we’ve ever been, a lot of that has associated with the pressure pumping business which is a very people intensive business. So I think I would be cautious about looking at the relative percentages because its – we’re different company in terms of mix than we were in those previous downturns.”

Baker Hughes 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

If oil remains at these levels, it will clearly have an impact on our customers

“As I mentioned in my opening remarks, our industry is seeing a number of evolving dynamics. The most obvious being the recent slide in oil prices. If oil remains at these levels for a sustained period of time, it will clearly have an impact on our customers in form of reduced cash flow and accordingly less funds available for capital expenditures.”

Companies sensitive to price could curtail activity, but national oil companies probably wont change anything anytime soon

“In the near term, we could see customers curtail activity, especially those who are more sensitive to commodity prices or pursuing marginal onshore and shallow water plays, but for national oil companies and deepwater customers, two areas where Baker Hughes is in a very strong position. We do not expect to see a meaningful change in activity anytime soon. And if lower commodity prices continue to drag on, we may also see divergence between international and North American markets.”

Historically North America softens first, but with current activity it’s less likely. Breakevens are $60-$70 per barrel

“Historically, when commodity prices soften, North America activity levels are the first to adjust. But today the combination of a stable business environment and more predictable production from the unconventionals has made North American activity more resilient. With current breakeven prices for most basins in the $60 per barrel to $70 per barrel range, we do not expect to see a meaningful pullback in North American activity in the near-term.”

We continue to project increased spending next year

“Although our customers are still in the process of refining the 2015 budgets at this time from what we are hearing from them, we continue to project increased well accounts and increased spending per well”

Not only are prices falling, but the industry is having to contend with geopolitical issues

“In addition to fluctuating commodity prices, our industry is encountering a steady stream of complex geopolitical issues. As an example, Baker Hughes has made a number of long-term strategic investments in Russia including manufacturing facilities, a world class technology center, and a strong local workforce. Russia has been a source of profitable growth for Baker Hughes and today contributes about 2.5% of our revenue. The U.S. and EU sanctions and subsequent drop in the Ruble will obviously reduce growth opportunities going forward.”

Our customers don’t really believe that this is where prices are going to settle

“As you well know and most of the people on this that are listening, our customers right now are in the throes of trying to determine what their budgets are going to be for 2015. And what I can tell you the channel checks I do with my peer customers are that they’re concerned with what’s going on in the oil markets, but they’re not at this stage I think frankly because we’re all a bit surprised with the markets. Are they willing to give it a whole lot of credibility either that these numbers are, what we’re going to see in terms of commodity prices. So, they’re still confident that, I think at this stage, these oil prices are not where they’re going to settle”

Breakevens are still lower. Prices need to stay at this level for a while to get people to stop drilling

“And also, let’s also realize that as you’ve written about and your peers, the breakeven prices in most of these basins with most of the customers is still well below what the commodity prices are. So, I don’t expect that we’re going to see any appreciable activity decline. But if oil should stay at this level for a couple of quarters and give it so to speak more credibility that this is what the environment is going to be, then certainly a few of the customers out there that are either more dependent on borrowing or maybe have a less attractive subsurface position could sideline. But I don’t see that being material for us or I guess, I am not projecting that anytime soon.”

$75 is the level where activity starts to slow. We’d have to see it there for a few months

” if we just look at the core most successful customers, I would say that it’s, I think $75 is a – is the starting point to where activity could start to slow. I don’t believe anything above that. And the second very big variable to that is the duration of it. So if we were to see $75 next week, I don’t think you’re going to see one iota of activity slippage, none.

But if we’re sitting at $75 come the holiday season or early into Q1, then certainly I think the conversations with the customers will be different. So it’s mid-70s and it’s, we’ve got to see a few months of that to give it, as I said earlier, credibility that this isn’t just bouncing all over the place, because customers are still in a pretty good economic – the right customers are in a pretty good economic position, the returns are still quite attractive and you know that.”

Peers are concerned but not nervous quite yet

“like I said most of the peers I talk to are not my customer peers, aren’t nervous, they’re concerned, they’re not nervous, they’re watching it closely, but once you stay down below 80 for a while then [indiscernible] conversation will change.”

Baker Hughes at Barclays Conference Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Fighting in Lybia has shut down operations in Libya

“Another challenge we are monitoring closely is the industry shutdown in the Libyan onshore market. Intense fighting in Benghazi and battles between rival militias in Tripoli has pushed the nation deeper into conflict. All Baker Hughes operations have ceased, and our assets have been secured until things stabilize.”

Brazil deepwater drilling is the most complex in the world

“This is one, if not the most complex drilling environment in the world, full stop. Successful deepwater drilling here requires experience, technology and exceptionally strong local content, and this matches our capabilities in country perfectly. As many of you remember, we spent nearly a decade introducing advanced technologies, new methodologies in cultivating an outstanding local workforce to reliably and accurately drill the presalt wells. And it should be no surprise that we are excited to resume our position as the leading provider of drilling services in the market.”

North America demand is extremely strong

“Now, in the lower 48, the positive trends we saw in the second quarter are carrying forward unabated. Rig counts are up, horizontal drilling is up, well counts are up. Laterals are getting longer and stage counts are increasing. The Permian rig count will grow about 10% this year, and we’re predicting similar growth next year. This is an exciting environment for Baker Hughes. Demand is at record levels for drilling services, drill bits, completion systems, artificial lift and production chemicals. And then there is our biggest product line, pressure pumping.”

Efficiency gains around well construction have largely played out

“The old efficiency game and gains around well construction folks have largely played out. Cutting another 14 days off, the time to drill a well in North America isn’t going to happen again. And if anyone thinks the cost of fracking a well is going to remain at today’s low levels, they’re delusional”

Petrobras has been in a lull, but that’s going to change as we get closer to 2016

“And the last thing I’ll say and, by all means – and maybe Trey wants to add on some comments, my sense for Brazil overall is that it’s been a lull over the last couple of years, but I think the customer there is going to grow the rig count, maybe the latter half of next year and certainly into 2016. So I think Brazil will re-emerge on the global scene as a more active driller than they have been over the last couple of years. And we look forward to being part of that again”

Baker Hughes 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“the most meaningful issue we faced in the quarter was timing associated with the ramp-down of our drilling contract in Brazil.”

“Also during the quarter, we faced the well-publicized shutdown across northern Mexico.”

“Unfortunately, these issues overshadowed growth and improved performance in other regions during the quarter.”

“In the U.S., despite a flat onshore rig count, our Pressure Pumping product line delivered improved revenue, operating profit and operating profit margin for the second consecutive quarter. Improved fleet utilization and record stages per day, resulting from increased 24-hour operations, market share gains and growing well count, contributed favorably. These gains were partially offset by continued pricing declines.”

“In the Gulf of Mexico, we experienced a strong sequential rebound in revenues and profits due to higher activity”

“In the U.S., we are reducing our onshore rig projections from our last guidance. However, activity is still projected to improve. In the second quarter, we exited with 1,692 rigs. We anticipate that the rig count will rise modestly to an average of 1,720 rigs by the fourth quarter”

“We currently forecast the U.S. onshore well count for 2013 to be approximately 35,000 wells, which is a reduction of about 4% year-on-year.”

“Looking internationally, the rig count is anticipated to continue recent growth trends in the second half of the year, yielding an average 2013 rig count of 1,360 rigs, with increases in every region. Excluding Iraq, this represents a 7% increase in the annual international rig count. ”

“Last night, we announced the launch of the Baker Hughes Well Count. This new index captures the number of wells which were spudded in each major U.S. basin”

“drilling efficiencies vary by basin. In the Williston, the Marcellus and the Eagle Ford, we’re seeing about 20% more wells per rig compared to this time last year, whereas in the Permian, wells per rig have hardly changed.”

“the Baker Hughes Well Count shows seasonality that wasn’t evident in the rig count alone. During the winter months, the wells per rig slows due to poor weather conditions.”

“The ongoing trend to continue increasing wells per rig is a fantastic opportunity for a technology-driven service company such as Baker Hughes.”

[analyst comment] “we have relatively range-bound commodity prices and a continued positive delta between kind of well count and rig count and E&P capital spending moving methodically higher”

“being closer to the customer, having a single point of contact, getting out of the organizational barriers that can hinder a divisionally-oriented company like we were, I think that’s probably — and that’s from a — that’s a thing that just kind of just keeps growing in terms of getting better.”

“We estimate — I don’t want to tell you how many billions we estimate the artificial lift market for unconventionals to be, but we have well over half of it for ESPs. But we could only play in about 15% of that spend. [our FleX pump product] takes us to about 75% of that spend.”

“we have about 1,300 different products in North America.”

Baker Hughes 1Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“North America took a step in the right direction, with growth in both revenue and margins. The results were driven by strong activity in Canada, along with improved utilization in our Pressure Pumping business. And we’re starting to see the U.S. market settle down. The declines in spot pricing for well stimulation are showing signs of tapering off, and the onshore rig count is projected to begin climbing after more than a year of consecutive quarterly declines.

Offshore, our customers experienced significant delays as the industry continues to adapt to changing regulations, and this is having an impact on our Gulf of Mexico business. Although these headwinds will probably persist for the short term, the long-term outlook remains bright. The number of ultra-deepwater projects continues to grow, and Baker Hughes is very well positioned to capitalize on these opportunities.”

“We anticipate that the rig count will rise to an average of 1,800 rigs for the second quarter. This would be the first increase in U.S. rig count following sequential declines over 5 consecutive quarters.”

“internationally. The average rig count is anticipated to grow steadily throughout 2013 to 1,316 rigs, with increases in every region. ”

“if $4.00 natural gas prices hold, the increase should generate improved cash flows for our customers. And while we don’t believe that $4 gas is enough to prompt the race back to the dry gas basins, these higher prices should help support, if not stimulate, additional investment in oil-directed drilling. We believe the North American market is on the road to recovery.”

[analyst comment] “I’d have to say the tone of your commentary as it relates to the international market in general, I think, are the most, I think, optimistic or positive that I’ve heard from any service company probably going back to the 2007, 2008”

[on the difficulties in the offshore business] “in the past, I think, if you had redundancy, if one didn’t — one pod didn’t check out, you were okay. Today, nobody’s going to run in the hole unless everything checks out perfectly.”

“I’m not going to try to guess when our government and our customers are going to get on the same page. And right now, it’s affecting us.”

“I think the industry is exceptionally tight on your subsurface expertise. There’s a war on talent in that area, geoscientists, LWD, MWD, directional drillers.”

“I think Iraq has got quite a journey from a service company perspective to be — it’s going to contribute earnings…it needs to start with our customers being more successful in terms of their own economics”