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Dodge & Cox Began to Collect, Should You Take a Position?

April 01, 2014 | About:

A few companies excel over their market peers, granting them an unconventional competitive advantage. Everybody knows the market leaders, or the mammoth companies, but there are other particular services that can give a firm greater exposure. No other example is more relevant than the rotary rig count offered by Baker Hughes (BIH). The Baker Hughes Rig Counts provides a weekly count of U.S. and Canadian drilling activity to the industry since 1944, and has become an important business barometer for the drilling industry and its suppliers. Most importantly, the index allows industry analysts to identify industry trends, while providing valuable information to prospect investors beyond Baker Hughes itself. After experiencing a decline in performance from mid-2011 to the end of 2012, the company saw great improvement in overall performance during 2013. Can the trend be expected to continue?

Mapping Current Activity

During the prior count dated March 21, the Baker Hughes Rig Counts reported a decline of 91 wells for Canada, while six had been added in the U.S. Meanwhile, the international are recording an increase of 16 wells during January. The last count, dated March 28 and February, respectively, saw increments in all three areas. However, Canada has recovered a little over half of the 91 wells lost during the second half of March. The increase in activity across the board is clear, offering strong synergies to be absorbed and materialized into growth.

Baker Hughes has seen greater activity, especially through new partnerships. With CGG (CGG), the company has signed a long-term agreement to provide RoqSCAN technology, a real-time, fully portable, quantitative and automated rock properties and mineralogical analyzer. Also, the firm will acquire Weatherford (WFT)'s pipeline and specialty services business through one of its subsidiaries. Last, the business has signed a letter of intent to develop integrated well completion solutions with TMK.

Product introduction has also been a highlight for Baker Hughes. The EasyReach extended-reach coiled tubing service is a response to the growing number of long horizontal wells and the need to be able to service them confidently. Meanwhile, the Baker Hughes AutoTrak Curve rotary steerable system has reached an unprecedented milestone, after drilling 10 million feet in unconventional shale plays in two years.

Mapping Future Activity

Baker Hughes has lost some ground in deepwater activity on the Brazilian basin during 2013 in drilling and logging services. Internationally activity is expected to be further compounded by higher mobilization costs, most notable in Norway. Additionally, hurricanes in the Gulf of Mexico and extreme winter conditions in the U.S., Canada, Russia and the North Sea will be the likely reasons behind a lower demand for the firm’s services and operations.

The higher note for Baker Hughes in the long term is a strong portfolio of products and services, which are expected to help the business post better-than-average results in North America and further expand in the international market. International expansion is key to growth in order to continue reducing exposure to North America. In line, major focus has been placed upon Iraq and Saudi Arabia in the Middle East specifically. Attention has already been given to growth opportunities in Europe, Africa, Russia and the Caspian region.

Currently trading at 26.5 times its trailing earnings, Baker Hughes’ stock carries a 12% premium to the industry average. Since 2009, the company has reported revenues and net income increases while sustaining debt levels, an uptrend only interrupted by employee conflicts in Norway that affected overall performance through 2011. While the stock price continues to recover on the back of positive oil and gas drilling trends, and a small premium, prospective investors can find in the firm a secure long-term investment. The good moment is confirmed by Dodge & Cox’s recent sale to collect winnings, while remaining the largest shareholder.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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