Why rig count outlook will drive Baker Hughes

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Why rig count outlook will drive Baker Hughes

In the last part of the series, we discussed energy prices and how they could affect Baker Hughes (BHI). In this part of the series, we’ll discuss the other key metric—the rig count.

Rig Count

Rig activity around the world

The rig count in North America increased 8% in 3Q14—compared to 3Q13. During this period, oil-directed rig counts increased 12%. Natural gas-directed rig counts declined 3%. The oil-directed rig count increased 14% in the U.S. Activity increased in highly productive shale resources like the Permian Basin. Read our articles on “Why the Permian Basin is important to US oil.”

Outside North America, rig counts mainly increased in continental Europe and the Middle East, especially in Saudi Arabia during 3Q14—compared to 3Q13.

Baker Hughes’ activity and spending outlook 

Apart from oil price, rig count, and oil and gas production, the customer spending outlook is a major driver for BHI’s business.

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In North America onshore, service activity increased due to more horizontal wells, longer laterals, more stages, and more proppant per stage. Requirement for BHI’s pressure pumping intensity increased. Offshore, adverse weather negatively affected the Gulf of Mexico rig activities in 3Q14. In 4Q14, the activity level should pick up.

Outside North America, persistently lower energy prices will negatively impact cash flow for its customers. This will mean less spending. In the near term, some customers may reduce activity, especially onshore players. However, national oil companies and deepwater customers are expected to continue to stay strong in the near term.

Key stocks and exchange-traded funds (or ETFs)

Higher onshore and offshore drilling activities will benefit oil and gas producers like Chevron Corporation (CVX) and Hess Corporation (HES). CVX and HES are part of the Energy Select Sector SPDR (XLE).

Higher offshore drilling activity will also benefit drill servicing companies like Weatherford International (WFT) and Schlumberger (or SLB). Both of these companies are part of the VanEck Vectors Oil Services ETF (or OIH).

In the next part of the series, we’ll discuss where BHI stands compared to its peers.

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