New Coverage Baker Hughes: $89 Trefis Price Estimate

Baker Hughes (NYSE:BHI) provides oilfield services, products, technology and systems globally to the oil and natural gas industry. The company has operations in over 80 countries and its oilfield services operations are organized under 4 geographic divisions. Besides oilfield services, the company also has an ‘industrial and others business’ that covers the downstream chemicals business, process and pipeline services, stimulation chemicals, reservoir consulting and software products. Its primary competitors are Schlumberger Limited (NYSE:SLB) and Halliburton Company (NYSE:HAL).

Demand for the oil & gas exploration services sector is driven by a strong rebound in global oil & gas demand and the increasing costs of finding and developing new sources of oil while maintaining production in mature fields. Rising oil prices have helped oil firms such as Exxon Mobil (NYSE:XOM), BP (NYSE:BP) and Saudi Aramco fund increased development of new oil finds which translates into higher revenues for upstream services firms such as Baker Hughes. In addition, the increasing technological and logistical complexity of oil and gas exploration will contribute to sales and profitability.

Coverage Launch; $89 price estimate for Baker Hughes

We recently launched coverage on Baker Hughes with a near $89 price estimate for the company’s stock, which is about a 30% premium over its current trading price. We have broken down our analysis of Baker Hughes along its four geographical divisions and one division for the revenues from its industrial and others business.

1. North America
2. Latin America
3. Europe, Africa and the CIS
4. Middle East and Asia
5. Industrial and Others

Oilfield services in North America

Baker Hughes earned 45% of its revenues and 69% of it operating profits from its North America division for the year 2010. Recovery in the exploration and production activity in North America has been driven by heightened drilling activity in shale plays and offshore exploration. We expect offshore, deepwater and unconventional exploration activity to increase driven by the rise in oil prices and the political push to reduce America’s dependence on foreign oil.

We forecast that Baker Hughes will  improve its revenues in North America over the next few years with most growth coming from unconventional sources such as shale and tar sands. The expected resumption of deepwater drilling in the Gulf of Mexico in the second half of 2011 is also expected to contribute significantly to the growth in revenues in this geography. We expect Baker Hughes’ margins  to rise as synergies from its merger with BJ Services are harnessed in the next few years.

International Operations

We forecast that Baker Hughes will increase the revenues from its operations around the world – most notably exploration projects in Iraq, Saudi Arabia, Brazil, West Africa, the CIS and the North Sea. Revenues are also expected to pick up on the account of exploration and production activity shifting offshore with output from land rigs on the decline in Latin America, the Middle East and Asia and in Europe, Africa and the CIS.

Baker Hughes also plans to improve its operating margins by lowering support costs and supply chain costs by diversifying its manufacturing base, consolidating suppliers and developing new suppliers in Russia, India, China, Mexico, Brazil, Malaysia and Singapore. Further savings are expected from efforts to improve well site execution, capital efficiency and optimizing the company’s approach to its supply chain.

See our full analysis for Baker Hughes