Baker Hughes (NYSE:BHI), the world’s third-largest oilfield services company, is expected to publish its Q3 2014 results on October 16, reporting on a quarter that saw strong exploration and production activity in North America and the Eastern Hemisphere. We expect the company’s earnings to rise on a sequential as well as a year-over-year basis, driven by stronger unconventional activity and possibly higher completions activity in the U.S. Gulf of Mexico. During Q2, quarterly revenues rose by around 8% year-over-year to around $5.93 billion while profit before tax margins rose from around 9% to around 13%.  Here is a brief look at some of the factors that we believe will drive the company’s earnings for the quarter.
Trends In The U.S. Land Drilling Market
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Rig activity in the United States remained strong over the last quarter, with the land-based rig count rising 3% sequentially to touch a two-year high of about 1,869. The well count has also seen an improvement, rising by around 5% year-over-year. Much of the growth has come from the Permian basin, where the rig count is up by 96 units, or about 21% year-over-year, as operators have been increasingly tapping into unconventional wells. Crude oil production in the United States has also trending steadily upwards owing to higher output from regions such as the Bakken and Eagle Ford shales. As of the end of September, U.S. field production of crude rose by around 11% year-over-year to around 8,837 thousand barrels per day. 
Pressure Pumping, U.S. Offshore Could Drive Earnings
Pressure pumping accounts for roughly 20% of Baker Hughes’ global revenues  and counts as one of the company’s most important product lines. The U.S. pressure pumping markets have seen a strong recovery over the last few quarters, driven by higher unconventional activity, reaching a point where some service providers have had to turn down customers due to a lack of capacity.  For this quarter, Baker Hughes could see improving revenues and profitability for its pumping product line, as its fleets see better utilization rates and improving cost allocation. Additionally, the company could benefit from higher services intensities as stage counts for fracking operations have been trending higher, while the lateral sections of horizontal wells have also been getting longer.
Offshore activity also remained reasonably strong through the quarter, with the average quarterly rig count in the U.S. Gulf of Mexico up from around 58 rigs last year to around 61 rigs. An increasing proportion of rigs in the regions are performing completions work, which is an area in which Baker Hughes has a competitive advantage, and this could translate to better earnings for the company. In general, deepwater services are quite lucrative for oilfield companies because they have high service intensities, long contract lives and they allow companies to provide integrated services.
Falling Oil Prices May Not Impact Near-Term Earnings
Oil prices have been trending lower over the past few weeks, impacted by increasing output from U.S. shale fields, a recovery in oil production in Libya and higher supply from Saudi Arabia. There have been concerns on the demand side as well, given the tepid global economic outlook and sluggish forecasts for oil consumption growth. Brent crude prices declined to around $88 earlier this week – their lowest levels since December 2010, while WTI prices have been at levels under $85. While the current crude oil pricing environment has been weighing significantly on Baker Hughes’ stock (down by over 20% in the last 3 months), we do not see a significant near-term earnings impact, given that the company operates largely based on contracts. However, if oil prices remain under pressure, it could reduce oil and gas exploration and production activity and upstream capex spending by oil companies, in turn reducing the company’s earnings prospects going forward.
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