High oil prices led by demand from emerging economies resulted in a strong 2011 for oil services companies. Global rig count figures reported for the month of January by Baker Hughes (NYSE:BHI) showed a 9% jump over the same period last year.  Upstream exploration budgets are strongly influenced by crude oil prices, which determine cash flows of major oil and gas producers. Benchmark oil prices remained above $100 /barrel for a significant period of time in 2011, resulting in higher exploration and production activity. The rig count is a standard industry metric used to gauge ongoing activity in the upstream sector. Oilfield services players like Halliburton (NYSE:HAL) have posted strong financial results last year.
We have a $72 price estimate for Baker Hughes, which is at a 20% premium over its current market price.
North America leads
A large part of the growth in the global rig count came from North America. The region added almost 350 rigs over the past year from a base count of around 2360 in the beginning of 2011.  A majority of this rig count growth came from shale exploration efforts in North America. Initially, a majority of shale exploration was directed towards gas rich plays but decreasing gas prices in the U.S. are forcing players to explore liquids rich plays. Oilfield services players have boosted revenues in the North American region over the past few years by providing services such as horizontal drilling and hydraulic fracturing which are crucial for the extraction of resources tapped in shale resources.
Recently, the lifting of the U.S. Gulf of Mexico moratorium has also boosted the prospects for Baker Hughes and its competition. Deepwater exploration efforts will result in a further growth in revenues for the company with growth in offshore rig count.
International rig count grew by a modest 10 rigs over the last year. However, with crude oil staying above $100 / barrel, we expect rig counts to increase over the next few years led by growth in regions such as the Middle East, the CIS and Latin America.Notes: