Baker Hughes is an oilfield services company that sells drilling equipment and helps oil exploration & production companies to drill oil wells. The company operates in 90 countries worldwide. The company earned $9.7 billion in revenue and $421 million in net income in 2009.
While the company is focused on expanding in high-growth sectors, the success of its ventures is not guaranteed. Since the services that are expected to generate a large amount of money in the near future are very costly, oil prices must stay high in order for companies to demand risky and expensive forms of oil exploration and production like deepwater. If prices stay up, oil and gas companies will be willing to pay big bucks for BHI's services; deepwater exploration has been shown, when it yields, to pay off well. Furthermore, lower output from maturing wells has sparked industry interest in extracting from more difficult reserves, increasing demand for BHI's high-efficiency drill bit business and driving up segment margins. But the company faces threats from seasonal storms that damage expensive equipment and slow production. BHI's competitors include Schlumberger, Halliburton, and Weatherford International, all of which are focusing their energies on the same market as Baker Hughes: the Middle East.
BHI's organization by product segment rather than by geographic location has created issues for the company in the past. When opportunities in Russia and the Middle East began to heat up, the company missed out on early contracting opportunities that Schlumberger, Halliburton, and Weatherford International were able to take because those companies had bases and employees in the areas. Baker Hughes seems to have seen the error of its rigidity, however, and is currently investing heavily to establish regional bases worldwide.
As an oilfield services company, BHI's fate is intimately connected to the fate of the oil industry as a whole.
As oil prices go up (and stay up), oil companies like Exxon, Shell, Chevron, and BP all have greater incentive to increase production; thus, price shifts have been a major driver in the recently increasing demand for exploration and drilling, which is in turn pushing up dayrates for exploration and drilling equipment, increasing industry profitability. Rising oil prices could mean that oil is getting more difficult to obtain, and there are many analysts who believe we are near, or even past, peak oil production. Many easy-access oil reserves are nearing maturity, but with oil prices so high, oil companies are now looking to more expensive means of increasing output.
Baker Hughes' growth strategy involves expending most of its energies in high-growth markets. Recently, this has taken the company to Russia and, especially, the Middle East, where new expensive high-tech equipment designed to operate more efficiently on complex geology and in mature wells has allowed oil and gas companies to increase output where not previously possible. High-efficiency drill bits are in increasing demand in these markets, and BHI's drill bit business could benefit. Most of BHI's investment has been in the Middle East, where the number of active Baker Hughes rigs increased by over the last few years 25.3%.
Turbulence in the Middle East poses a threat to BHI because the region is a smoldering hotbed of drilling activity. BHI's facilities, as "western establishments", would be likely targets for terrorist attacks. Aside from harming the employees at such facilities, terrorist attacks could slow production and effect costly damages to expensive equipment - all leading to declines in regional profitability. Furthermore, investing in the equipment required for success in the Middle East is costly, as the technology that is needed is complex. In the current price climate, demand for such expensive equipment is high, but if oil prices were to fall, Baker Hughes could be left high and dry.
With oil prices so high and offshore well output decreasing in shallower waters, the offshore oil and gas industry is turning to deepwater exploration to increase output. This new demand has pushed up dayrates for deepwater technology, making it very profitable; BHI has taken notice, and has increased its spending in order to make strides in the market. For example, Baker Hughes acquired Nova Technology Corporation in order to absorb Nova's deepwater monitoring and chemical technologies. The research and development involved in deepwater drilling is very expensive, and the complexity of the technique means that striking oil thousands of feet below sea level is far from assured. As long as oil prices are high, however, oil and gas companies will be willing to pay. Despite the risk of failure, deepwater fields have been found to yield huge amounts of oil and gas; for example, in November 2007, Brazilian oil company Petrobras discovered 5-8 billion barrels of oil equivalent in the deepwater Tupi field off the coast of Brazil. With oil prices so high, the possibility of large yields makes deepwater technology worth the price. If oil prices fall unexpectedly, however, the demand for these more expensive extraction techniques will decrease dramatically, causing deepwater dayrates to fall and profits to drop.
With so much revenue coming from pulling oil and gas out of the Gulf of Mexico (see Business Financials), the hurricane season creates a large seasonal risk to the company. Third-quarter income tends to lag when production is brought down to prevent damage from the storms that sweep the coast in late summer. Similar problems exist during the fourth quarter in the turbulent North Sea. The extent to which the storm season affects BHI is dependent on the strength of the storm season - obviously, stronger storms mean lower margins.
Whether it’s because of climate change fears, the rising price of oil, or the desire to separate energy needs from terrorist regimes, people are slowly becoming disillusioned by the world's dependence on oil and gas. Many developed, politically-progressive regions like Europe are beginning to transition away from these sources of energy, and towards renewable energy. In emerging markets like China and India, however, the drive for economic growth supersedes environmental concerns, and oil, despite increasing prices, is still less expensive than most renewables. Since emerging markets are where most of the future opportunities in the global economy lay, the oil and gas industry, including oilfield services companies like Baker Hughes, could continue to grow in conjunction with a growing renewables industry.
As a diversified oilfield services company, Baker Hughes faces competitors like Halliburton, Weatherford International, and industry leader, Schlumberger. All of these companies offer oilfield services ranging from exploration drilling to well completion, and all three of these companies have recently been focusing on expansion in the Eastern Hemisphere, especially in the Middle East. Since this region is also a major focus point for Baker Hughes, the large amount of opposition could put pressure on BHI's margins, as increased competitive pressure would lead to lower dayrates and higher R&D costs from attempts to create better technology.
In the deepwater sector, BHI faces its greatest competition from newly formed giant, Transocean, as well as some smaller drilling companies like Noble and Diamond Offshore Drilling. BHI might be spreading itself thin by developing both in the Middle East and in the deepwater sector, as diversified spending could prevent the company from differentiating itself in either field.