Baker Hughes Warns That Profitability May Suffer Ahead

BHI: Baker Hughes logo
Baker Hughes

Oilfield services provider Baker Hughes (NYSE:BHI) warned that the changing dynamics in the North American market could impact its operating margins. According to a company release, the shift from gas drilling to liquids focused drilling and other operational challenges could push down the company’s operating margins before tax to 13.2 – 14.2% from 18.7% in Q4 last year. [1] Competitor Halliburton (NYSE:HAL) has also warned that profits may be hit this quarter because of the changing industry conditions.

We have a $66.14 price estimate for Baker Hughes, which is 60% premium to its current market price.

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Changing conditions

Low gas prices in the U.S. have forced shale explorers to shift from gas production and concentrate on liquid rich plays. The realignment in the industry has forced service providers such as Baker Hughes to make changes to their logistical set-ups, resulting in falling efficiency.

Baker Hughes has reported that its fleet utilization as well as pricing in Q1 will be affected because of the ongoing shift. [1] The company has also said that personnel and logistics costs will be higher than anticipated earlier. Pricing in the pressure pumping services segment is also falling because players are being forced to concentrate on liquid rich sectors. (See: Low Gas Prices Will Weigh on Baker Hughes’ Pricing in North America) Pressure pumping has been an important driver for the growth of the company’s revenues from North America, where demand for such services has increased dramatically because of widespread shale exploration activity.

Margins in Q1 2012 will also be hurt because of higher cost of critical input costs and lower demand for pressure pumping services from Canada. The oilfield services player has also said that it will look to revise its capital expenditure budget for the year, to adjust for the changing conditions in the pressure pumping market in the North America market, which accounts for a major portion of our estimate for the company’s overall price estimate. However we expect the profit margins to pick up in H2 as the company readjusts its supply chain to meet changing industry conditions. We will look to revise our estimate for the company based on its Q1 results.

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  1. Baker Hughes Issues Outlook for the First Quarter of 2012, PR Newswire [] []