Baker Hughes Could Benefit From Increasing Gas Rig Count

by Trefis Team
+3.15%
Upside
72.38
Market
74.66
Trefis
BHI
Baker Hughes Incorporated
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Baker Hughes released its weekly North American rig count data on Monday. Although the total US rotary rig count declined last week due to reduced onshore exploration activity, the number of offshore and gas rigs grew. There were a total of 1859 active rigs in the United States, down by 5 since the previous week. [1] The rotary rig count serves as an important barometer of activity in the oilfield services industry, determining the demand for products and services provided by Baker Hughes (NYSE:BHI).

Improving Gas Rig Count

There were a total 454 active natural gas rigs in the US, up by 6 over the last week. Also encouraging was the increase in the number of horizontal rigs, which grew from 1133 in the previous week to 1149. [1] Horizontal rigs are often used in shale gas production. The number of gas rigs is down by over 50% since last year due to a sharp decline in natural gas prices. The shale gas boom led to an oversupply of natural gas, hammering prices by over 70% over the last 4 years. Natural gas currently trades at around $3/MMBtu, down from over $13/MMBtu in 2008. [2]

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Baker Hughes To Benefit

A revival in natural gas exploration and production activity will boost demand for services like pressure pumping. Pressure pumping is used to improve the productivity of oil and gas reservoirs by pumping fluids at high pressure, stimulating the flow of oil and gas. The pumping market is estimated to be as large as $31 billion globally with over three-quarters of the business coming from the gas and unconventional resources. [3]

High oil prices and the renewed interest in drilling in the Gulf of Mexico have increased the demand for offshore rigs. The offshore rig count has grown by about 60% over the last year and 4% since last week.   Offshore well services command higher day rates and offer better margins for Baker Hughes. It will also allow Baker Hughes to offer more integrated services, positively impacting Baker Hughes North American rig services EBITDA margins.

Baker Hughes (NYSE:BHI) stock has staged a comeback of sorts over the last 3 months. The stock rose from about $38 in June to close at $46.32 on Monday, supported by encouraging Q2 numbers.

We have a $58.97 price estimate for Baker Hughes, which is about 27% ahead of the current market price.

Notes:
  1. Baker Hughes Rotary Rig Count [] []
  2. 5 Year Natural Gas Prices and Price Charts []
  3. Pressure Pumping,PacWest Consulting Partners []
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