Canadian Rig Count Growth Helps Baker Hughes But Low Prices Still A Concern

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Baker Hughes Incorporated
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Baker Hughes (NYSE:BHI) released its monthly international rig count data, which indicates that the rig count in most geographies is sliding, following the drop in crude oil prices in Q2. The rig count dropped in Latin America and Europe while it held steady in Africa and the Middle East. [1] Overall, the foreign rig count (excluding the U.S. and Canada) dropped by about 2% since June, but is still 6% higher than the level at the end of Q1 mainly because of higher exploration activity in Africa and the Middle East. The rig count in Canada showed a sharp 35% jump in July, which helped offset the drop in activity in the U.S. The rig count is a widely accepted proxy for exploration and production activity in a geography.

We are looking to slightly revise our $50 price estimate for Baker Hughes, which is roughly in line with its current market price.

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Changing pattern

Strong exploration activity in international markets has helped oilfield services providers offset the slowdown in the U.S. in 2012. However, the fall in the rig count in the U.S. has been offset by the seasonal rise in activity in Canada. A sharp drop in natural gas prices this year has resulted in lower exploration activity in the North American region. However, strong oil prices in 2012 have resulted in the rise in rig count activity in international markets this year.

The rig count in the Middle East, excluding Iraq, is up from 287 a year ago to 401 in July. [2] The rig count in Africa is up 72% for the same period as explorers have announced multiple significant offshore gas finds in the region. Since much of the growth in the region is in the offshore market, the revenue per rig in the region is also expected to rise significantly during the period. The rig count in Latin America and Europe dropped for the second consecutive month, indicating that the drop in oil prices could limit upstream activity. Falling oil prices impact the cash flows of explorers as well as ROI on projects, resulting in a drop in upstream budgets. If oil prices fall further because of weakness in the global economy, our forecasts for Baker Hughes could be significantly altered.

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Notes:
  1. Rig Count, Baker Hughes []
  2. Rig Growth in Africa, Mideast Exceeding Asia, Baker Hughes Says. Bloomberg []
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