Baker Hughes’ Downsizes In Brazil After Losing Contracts

Baker Hughes (NYSE:BHI), the world’s third largest oilfield services company, has been cutting its headcount in Brazil owing to some significant contract losses to rival Halliburton. ^[1] The company has already laid off around 150 workers in the last two months and intends to terminate another 150 positions in the near future, according to the union representing  some of the employees. Baker Hughes currently has over 1,800 employees in Brazil. The downsizing comes at a time when Brazil’s state-backed oil producer, Petrobras, is becoming more cautious with its spending as it scales back drilling activity in the country’s massive pre-salt oil fields.

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Growing Pains In The Brazilian Pre-Salt Offshore Market

Brazil has emerged as one of the world’s largest offshore drilling markets after a consortium led by Petrobras discovered oil in the country’s deepwater pre-salt fields in 2007. There have been a string of new discoveries since then and offshore drilling activity in the country has grown significantly, with the overall offshore rig count nearly doubling over the last 5 years. Producing oil from these pre-salt fields is relatively challenging given the water depths and high pressures involved and this opened up new opportunities for experienced international contractors in the Brazilian market.

While the long term potential of the pre-salt area remains strong,  the offshore industry in Brazil is currently undergoing some growing pains. Petrobras is the dominant player in the country’s offshore industry.  The company is the sole operator of all production sharing agreements and is authorized to hold a minimum 30% stake in all pre-salt projects. ^[2] However, the company has been tightening its spending off late, as it has been facing some difficulty in funding its $237 billion five-year investment plan. The company is also facing some pressure on the revenue front, since the Brazilian government has denied its request to charge market prices for petroleum in Brazil. ^[3]

Petrobras has also slowed down drilling of new wells in the pre-salt region since it has been witnessing a higher-than-expected flow rate from some of its existing wells. Additionally, in recent quarters, Petrobras has been focusing on its drilling programs in the Campos basin, which is a more  mature and developed region with a better network of pipelines and platforms in place. ((Bloomberg)) Since drilling in the pre-salt is more service intensive when compared to other offshore fields, this has had an impact on overall activity levels in Brazil’s offshore industry and the size of the country’s offshore drilling market has actually declined since last year.

Baker Hughes Is Losing Market Share To Halliburton In Brazil

Baker Hughes has been facing margin pressures in Brazil over the last few quarters owing to subdued demand as well as lower pricing on some of its new drilling services contracts. ((Baker Hughes Form 10-Q)) For the first nine months of this year, the company’s revenues from its Latin American operations (including Brazil) were down by around 3% year over year, while profits before taxes were down by over 90%. The company’s market share in Brazil’s offshore drilling services space has fallen from around 50% last year to about 20%. ((Bloomberg))

In contrast, its key rival Halliburton saw its market share rise to around 50%. The nature of the contracts that Baker Hughes has lost to Halliburton, and reasons it lost them, are not clear.  That said, Halliburton has been gaining significant global market share in the offshore space driven by new technology deployments. The company has seen its deepwater revenues grow at a rate of around 31% over the last two years, significantly exceeding the industry growth rate of around 13%. Halliburton also has significant experience in the Brazilian offshore space, having drilled hundreds of deepwater wells, as well as a large number of pre-salt wells.((Halliburton))

Despite the current challenges, we believe that the offshore services market is Brazil holds a lot of promise, given the massive reserves (as much as 50 billion barrels) in the pre-salt fields. ((US EIA)) As the market expands and more activity shifts towards development, companies like Baker Hughes could see an upside due to their strength in completion and production technologies.

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1. Bloomberg [↩]
2. US EIA [↩]
3. Reuters [↩]