Weekly Oilfield Services Notes: U.S. and International Rig Counts, Halliburton’s Divestitures

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The oilfield services sector had another mixed week. The PHLX Oil Service Sector (^OSX) index rose by about 4% through the week, closing at levels of around 207 on Friday as crude oil prices moved higher on the back of subsiding fears of the Iranian nuclear deal resulting in an immediate surge in global crude oil supply and also due to an increase in Saudi Arabia’s crude oil prices for Asian buyers (related: Weekly Oil & Gas Notes). The price of the front-month Brent crude oil futures contract on the ICE increased by around 4% through the last week and is currently trading around $57.50 per barrel. However, on Friday, Baker Hughes (NYSE:BHI) reported that the U.S. oil rig count posted its sharpest decline in nearly a month after two weeks of relatively thin declines. In other news, Halliburton (NYSE:HAL) said that it would be divesting three of its drilling business as it looks to gain antitrust clearance on its$34.6 billion deal to buy smaller rival Baker Hughes. Here is a brief look at the news that mattered in the oilfield services industry last week.

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U.S. Rig Count Continues To Plummet, International Count More Resilient

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Baker Hughes reported that the United States oil rig count fell by 46 units last week to about 760 rigs, posting its sharpest decline in a month, as drillers laid down rigs as spending cuts continued to take effect. [1] The oil rig count – which has been falling for 18 weeks straight – is down by roughly 49% since the beginning of this year and around 52% from its mid-October 2014 highs. The oil rig count in the liquids rich Eagle Ford shale declined by 11% to 110 rigs while the count in the Permian basin fell by about 7% to 260 rigs. Separately, Baker Hughes reported the international rig count numbers for March, indicating the number of oil and gas rigs in markets excluding North America fell by 7% year-over-year and by about 2% sequentially. International drilling activity has been much more resilient in the wake of the oil downturn. Unlike North American activity, which is driven by high-marginal cost tight oil projects, international oilfield activity is driven by longer-term projects that usually have lower marginal costs of production.

Halliburton Will Divest Businesses To Gain Antitrust Clearance on Baker Hughes Deal

Halliburton is planning to divest three of its drilling businesses as it works to persuade antitrust regulators to clear its $34.6 billion deal to acquire Baker Hughes. The three businesses are Fixed Cutter and Roller Cone Drill Bits, Directional Drilling and LWD/MWD (logging while drilling and measurement while drilling). [2] The company expects to complete the sales in same time frame as the closing of the Baker Hughes deal (expected in the second half of 2015). According to consulting firm Spears & Associates, Halliburton and Baker Hughes together hold about 41% of the $5.6 billion drill bits market, 32% of the $16.5 billion directional drilling market and roughly 45% of the $4.5 billion logging-while-drilling market globally. While we don’t expect Halliburton to see particularly attractive valuations for the units – given the weak crude oil pricing environment and the declining demand for drilling services – prospective buyers should see value in the technology and talent available within the businesses.

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Notes:
  1. Baker Hughes Rig Count []
  2. Halliburton Press Release []