Baker Hughes Incorporated Sees a Light Amid Oil Market Darkness

By Markets Fool.com

Oil-field services provider Baker Hughes recently reported strong fourth-quarter results. Unfortunately, those results were overshadowed by an increasingly uncertain short-term outlook as a result of plunging oil prices. However, CEO Martin Craighead sees the pain of the downturn leading to long-term gains for the industry.

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Here we go again
In opening comments during the company's quarterly conference call, Craighead emphasized the industry's cyclical nature:

[...] our industry is clearly in the early stages of a down cycle, the same sort of cycle we enter once or twice a decade. As with past cycles, the early days are always marked with a high degree of uncertainty -- which customers will cut spending and by how much, how fast will rig counts drop, and where and when are we going to reach the bottom? And we don't have precise answers to all these questions and no one frankly does. But we have been through this before, many times in fact.

Craighead noted that no matter what analyst or industry executives say, no one can actually predict these downturns, nor when the next up cycle will begin. The industry just knows these downturns happen every few years, and now it needs to adjust. He then launched into a brief history lesson:

What we have learned in the past is that when the market turns down, it turns swiftly. In each of the last three downturns dating back to the 1990s, we have seen North American rig counts fall between 40% and 60% in the space of only 12 months. International rigs don't tend to fall as sharply but begin to drop steadily a couple of months after the first signs of weakness appear in North America.

Craighead said Baker Hughes does not believe "this cycle is going to any different" than prior cycles, and that the company has "navigated" many such pullbacks and surges in the industry.

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A word of warning and one of optimism
Craighead, though, said the industry needs to adjust in order to not only survive the downturn but thrive on the other side.

This industry can't simply hope and wait for oil to climb back over $100 a barrel. Instead, we must adapt to a new reality of sustained lower commodity prices. A major element in this new reality will be technology, and to that end we are continuing our investment in fundamental research and product development because our customers' need for innovative new products is more critical than ever before. Today our scientists and research engineers are focused on redefining what is possible and reshaping the limits of the industry's three fundamental challenges, lowering the cost of well construction, optimizing well production, and increasing ultimate recoveries.

By using technology to lower costs, oil companies can get more out of their assets. This will improve profitability in the short term when prices are low, and it will lead to stronger long-term results should oil prices improve, which is still a very distinct possibility, according to Craighead:

[...] longer term, the outlook for our industry remains strong. The world's demand for energy will continue to climb and the supply of energy will continue to increase in complexity requiring greater service intensity and more advanced technologies.

Investor takeaway
Clearly, the industry has hit a rough patch and will remain weak for a while unless oil prices suddenly burst higher. However, the industry has endured these tough times before and will manage through this trouble as well. That said, the industry must adopt new technologies to bring costs down, as it simply can't bank on the return of $100 oil to bail it out.

The article Baker Hughes Incorporated Sees a Light Amid Oil Market Darkness originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned, but highly values the insight that Baker Hughes management has for investors. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.