Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Baker Hughes is enjoying the single life.

In the six months since its $34 billion merger with Halliburton was called off, Baker Hughes has been remaking itself. Walking away with a $3.5 billion break-up fee from its erstwhile suitor certainly helped. But the real improvements have been all of Baker Hughes' own making.

Exhibit A, revealed in Tuesday's earnings report, is a 30 percent bump to the oilfield services' company's annual cost-savings target. That was set in May at $500 million, but Baker Hughes reached $600 million in savings by the third quarter, and it expects to hit $650 million by year end. Taxed and capitalized at 10 times, that extra Ebitda is worth roughly $1 billion. Investors added double that to Baker Hughes' market cap on Tuesday morning, though.

Round Trip
Baker Hughes' market cap is now where it was around the time its deal with Halliburton was announced
Source: Bloomberg

Those extra savings should translate into higher profit forecasts. Assuming analysts had not baked in any more than the original $500 million target, just adding $150 million to consensus Ebitda forecasts makes a big difference to Baker Hughes' relative value:

Peer Pressure
Baker Hughes' Ebitda multiples look more in line with peers when adjusted for the additional cost savings
Source: Bloomberg, Bloomberg Gadfly analysis.
Note: Enterprise value as a multiple of forecast Ebitda. Baker Hughes (pro forma) data reflect consensus Ebitda forecasts plus $150 million per year.

The underlying philosophy is just as important. When Baker Hughes broke it off with Halliburton, it made it clear that going back to business as usual wouldn't work. Lower-for-longer oil prices and shorter investment cycles due to the increased role of shale production required a more flexible approach -- a theme now echoed across the oilfield services sector.

Apart from cutting costs, Baker Hughes is partnering with local services firms in certain markets where it can provide expertise and technology and, helpfully, indulge governments that want to nurture a domestic service industry of their own rather than just bring in foreign contractors all the time.

This carries risks of its own, around making sure Baker Hughes captures an adequate proportion of the value in those sales channels and that its proprietary technology doesn't show up rebranded elsewhere. Yet the opportunity to expand the addressable market while keeping capital expenditure on full sales channels to a minimum looks worth it.

Besides maintaining flexibility, the key to thriving in this new environment is for oilfield services providers to showcase tools that can help their clients, the E&P companies, also do more with less. On this front, Baker Hughes has some clear advantages, for example in so-called artificial lift -- technology that squeezes more oil to the surface -- and its AutoTrak directional drilling systems. Baker Hughes believes the latter are exceptionally well-suited to the very long horizontal wells now being drilled in U.S. shale as, again, E&P companies aim to produce more oil, more quickly with their (constrained) investment budgets.

In addition to all this, and in marked contrast to virtually the entire energy sector, Baker Hughes has net cash on its balance sheet (thanks, Halliburton). Things are still tough out there, but Baker Hughes displays some formidable self-reliance.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net