Higher Stage Counts Will Influence Baker Hughes’ Pumping Business, New Capacity Could Keep Pricing Sluggish

Baker Hughes‘ (NYSE:BHI) pressure pumping business is possibly the company’s single most important product line, accounting for about a quarter of its overall revenues. We believe that the business should see some positive developments in 2014,  driven by increasing horizontal drilling activity as well as higher fracking intensities, although new capacity additions in the market could slow down the recovery. In this note, we take a look at the near term outlook for the company’s pumping business.

See Our Full Analysis For Oilfield Service Companies Halliburton| Schlumberger |Baker Hughes

Horizontal Drilling Activity, Rising Stage Count

While the rotary rig count in the U.S. land market has remained relatively flat year-over-year, there have been some encouraging trends in terms of rig efficiencies that have resulted in more wells being drilled. For instance, the average number of wells drilled by a rig per quarter rose to around 5.34 during Q4 2013 up from around 4.92 a year ago. ^[1] Additionally, horizontal drilling, which is a precursor to fracking activity, has also been expanding. Currently, about 67% of all rigs operating in the U.S. are horizontally directed and the  number could grow as more shale activity occurs in the Permian Basin, which has traditionally been one of the country’s largest conventional drilling basins.

Additionally, the number of frac stages per well has also been trending upwards, particularly in regions such as the Eagle Ford shale, where operators have been actively drilling to maintain their outputs. The total number of fracking stages performed has been steadily rising over the last few years. PacWest Consulting Partners estimates that a total of over 375,000 stages were completed in the U.S. land market in 2013 and the number could be poised to cross 400,000 this year. ^[2]

Supply-Demand Gap Will Narrow, New Expansions Could Continue To Hinder Pricing

As of last year, Baker Hughes estimated that the U.S. pressure pumping market was oversupplied by around 20% and it seems likely that the oversupply could persist into this year despite the demand growth. Pacwest estimates that there will be an additional 400,000 hydraulic horsepower (HHP) of net capacity additions to the U.S. land market in 2014. This would translate to a capacity addition of roughly 2% year-over-year, given that capacity at the end of last year is estimated to have been around 18.5 million HHP. This is likely to prevent prices from rising, although the improving utilization rates could help margins (see Trends That Will Drive Halliburton and Baker Hughes Pumping Business This Year).

Don’t Expect Currently High Gas Prices To Stimulate Activity

Of late, natural gas prices have seen a significant uptrend, rising by as much as 30% year-over-year. However, we do not think that gas prices will remain strong enough to stimulate additional gas directed activity, since the current price increase is largely due to colder than expected weather and higher inventory draw downs. However, if gas prices continue their strong run into the summer (on a year-over-year basis), it could translate into higher gas based drilling and fracking activity. This could prove very positive for the broader fracking market since shale gas wells require a higher pressure pumping capacity when compared to oil wells, resulting in better demand for fracking fleets.

1. Well Count, Baker Hughes [↩]
2. Frac Price Increases on the Horizon; US Land Achieved Record Frac Stage Counts in 2013, Pacwest Consulting, February 2014 [↩]