Why Baker Hughes Is Betting On Reservoir Productivity Enhancement

The oil and gas industry has been under increasing pressure from shareholders seeking better returns on their investments, after years of heavy capital spending and middling cash flows. Investment returns in the sector have fallen to levels of around 10% to 15% during the last four years, down from around 25% to 30% from 2004 through 2008, according to data compiled by IHS. ^[1] This has led to an increasing focus among oil majors to improve the productivity of their hydrocarbon wells and maximize cash flows. This trend is also reflected in their capital spending mix. According to Barclays’ Global 2014 E&P Spending Outlook report, a majority of  the surveyed oil companies indicated that their exploration spending was likely to remain at current levels or even decrease slightly this year, while production-related spending was expected to rise. Oilfield services companies such as Baker Hughes (NYSE:BHI) have been responding to this growing need by providing customers with new technologies that help to boost the initial production rates and ultimate recovery rates of reservoirs.

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Trefis has a $ 70 price estimate for Baker Hughes, which is slightly below the current market price.

Baker Hughes Recent Deals Highlight Importance of Well Productivity

Companies are sometimes only able to extract about 10% to 15% of the total reserves present in shale reservoirs, and this means that even small incremental gains in the recovery rate could bode well for their profitability. Earlier this year, Baker Hughes acquired Perfomix, an oilfield software technology company that provides tools to enhance the performance of oil and gas reservoirs. Perfomix software enables oil companies to collect and interpret data to help them perform drilling, pressure pumping, completions and production operations.  Deepwater subsea fields could also be ripe for productivity enhancement. Although these wells can cost upwards of $100 million to drill, they sometimes have recovery rates of below 10% of the well’s total reserves. ^[2]  Baker Hughes recently formed an alliance with Norway’s Aker Solutions to develop technologies that will reduce costs and increase the production and ultimate recovery rates for subsea wells. The deal would serve to combine Baker Hughes’ strengths in well completions and artificial-lift technology with Aker Solutions’ expertise in subsea production and processing systems.

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1. Investor push to cut spending hindering M&A markets, FuelFix, March 2014 [↩]
2. Baker Hughes and Aker Solutions Form Subsea Production Alliance, Market Watch, April 2014 [↩]