Earlier this week, Baker Hughes reported financial results for the final quarter of 2012. As had been telegraphed, earnings were down compared to the same period a year ago. Revenues were off as well. Below are some thoughts regarding what we’ve read and heard from the company’s management and its customers, as well as some input from others in the oilfield:
- We get the sense Baker Hughes is beginning to re-evaluate some of its strategic assumptions and decisions. For one, management is now rationalizing certain operations in global geo-markets whose prospects are questionable. This seems a smart, if overdue, move.
- Overall, management is more optimistic about international markets and the Gulf of Mexico than the domestic land market. Domestic capex for Baker Hughes in 2013 is expected to be only a third of 2012 levels. A large amount of the change in capex is in pressure pumping, where the company sees 20 – 25% overcapacity in the domestic market. Management believes the rig count needs to grow by 300 rigs before excess pressure pumping capacity can be absorbed. However, few predict such growth over the next 12 months.
- Management continues to view Baker Hughes’ oilfield tools units as a strength. We tend to agree. In the market place, however, there’s a perception by some that its new-product pipeline is not what it needs to be. Some have noted that a lot in the way of current sales and profits stems from products and technology originally designed by Baker Hughes engineers several years ago. The obvious concern is that as these older products and technologies begin to lose their edge, there’s little in the way of new offerings to fill the gap. A greater sense of urgency and aggressiveness around developing and commercializing its products and technology would help assuage these concerns.
The piece we published on Baker Hughes earlier this month clearly struck a chord with both current and former customers and employees of the company. Feedback regarding the report was as heavy as we’ve experienced for an article focused on an individual supplier. Below summarizes some of what we’ve heard:
- There’s little conviction that Baker Hughes’ management will assertively pivot from its current path of sweeping changes. None expect a reversal of the company’s strategy. The more likely path is a series of incremental changes that will take longer to implement. The fear is that it may take too long.
- Since its reorganization in 2009, the company’s lost much in the way of its legacy culture, processes and know-how. Turnover in key functions is reportedly running high. Its pressure pumping business, which includes the hydraulic fracturing service line acquired as part of the BJ Service merger, has reportedly suffered serious defections. Culturally, Baker Hughes appears to be in a kind of no-man’s land — the “old” is gone, but not enough “new” has taken its place.
- Baker Hughes’ existing structure is seen as inflexible and not particularly well-suited to compete in more competitive markets like North and Latin America. Management seems to be betting it can extract higher margins and revenue growth from certain international regions where fewer competitors exist. While this strategy might in the end prove successful, history has shown such forays into international markets often result in lower profits than expected after the onset of factors such as local-content requirements, competition, changes in political governments/regimes, contract renegotiations and creeping nationalization.
The Bottom Line
The challenges at Baker Hughes are as much about internal culture as they are about products, services, operations and strategy. While management is beginning to address some of these issues, some worry if its efforts will be too little, too late.