Rig count in the U.S. saw a decline in the past week as drilling activity directed towards natural gas continued to fall. The count for rigs directed towards gas declined by 7 in the week ended 29th of June.  The fall indicates that interest in gas exploration continues to suffer despite a minor rally in commodity prices over the past month. Rig count directed towards liquids remained stable in the period. The gas rig count has fallen by almost 40% over the last year, as players have shifted attention to oil exploration to limit exposure to low natural gas prices in the U.S. The rig count is crucial in estimating the health of the exploration and production industry and the revenues and margins of Baker Hughes (NYSE:BHI).
We are revising our $56 price estimate for Baker Hughes, which is at a 35% premium to its current market price.
North American market
Despite the falling gas rig count in the U.S., the overall count for the North American market continued to grow as oil exploration remained stable and the rise in the rig count in Canada. The rig count is Canada showed a sharp 10% increase in the last week, pushing up the overall count for the region. Over the past few months, the exploration and production industry in North America has seen a sharp shift as producers are rapidly cutting down on gas production and focusing on oil rich plays. The shift has resulted in operational and logistical challenges for oilfield services firms such as Baker Hughes, and is expected to suppress their margins over the rest of the year.
The falling gas rig count is also resulting in other issues for Baker Hughes. A concentration of industry capacity in liquid rich plays is resulting in a downward pressure in the pricing of pressure pumping services. The oilfield services industry is also being impacted by the rise in input costs and the prevailing conditions are making it difficult for players to pass the costs to customers. These factors are expected to weigh in on our upcoming revision of the company’s target price.