Low Gas Prices Will Weigh on Baker Hughes’ Pricing in North America

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Baker Hughes

Oil field services players like Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL) that have significant exposure to the North America market may be impacted by low gas prices in the U.S. Both of the companies have ridden the shale exploration boom in the country to boost revenues and profitability in the past couple of years. However, with major gas producers like ConocoPhillips and Chesapeake announcing production cuts and activity shifting to liquid rich basins, oilfield services players may be forced to lower pricing and reallocate resources leading to short-term inefficiencies. Both Baker Hughes and Halliburton derive a large chunk of their value from their operations in North America. We have a $71.60 price estimate for Baker Hughes, which is at a 40% premium to its current market price.

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Pressure on pricing

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Halliburton announced earlier during its Q4 results conference that it expected some disruptions in its North America operations because of services being realigned to target liquids rich plays in the U.S. Gas prices in the country have fallen to their lowest levels in the past 10 years because of oversupply and a mild winter pushing down demand. There have been efforts to export the surplus resource to foreign markets, where prices are much higher. However, in the short term, low prices could hamper gas exploration and production activity in the U.S., hurting Baker Hughes’ growth plans in the geography.

We depict the pricing trends in markets using the revenue per rig metric for the company, and we forecast a long-term rise in pricing because of the increasing service intensity of exploration and production activity.

According to an analyst quoted by Barron’s, pricing in the North American pressure pumping market may fall in the future. [1] Pressure pumping services have been an important revenue driver for Baker Hughes and other oilfield services players. Analysts expect the higher competition in oil rich plays to hurt the pricing environment further. Companies may also suffer from lower efficiencies as they realign their services to target new shale plays.

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  1. Baker Hughes, Halliburton Downgraded on Pricing Pressure, Barron’s []