Baker Hughes (NYSE:BHI) will announce its results this week. The oilfield services firm is expected to post slight revenue and profitability declines over the past quarter. Low gas prices and seasonal changes will impact the company’s performance in North America, Baker Hughes’ biggest market. Last week, competitors Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) came out with their Q1 earnings last week announcing minor revenue falls over Q4 2011 and pressure on margins. Business in international markets remained strong, benefiting from deepwater activity.
North American change
With gas prices falling below $2 /Million British thermal units (MMBtu), producers are cutting down on natural gas exploration. With fewer rigs directed towards gas drilling, service providers are redeploying their rigs and worker crews to oil rich plays.
The changes are impacting the utilization and efficiency of oilfield services player. Baker Hughes has earlier indicated that the operating margins in the quarter may fall to around 13 to 14% from over 18% in Q4 2011. (See: Baker Hughes Warns That Profitability May Suffer Ahead) Operating costs have also been pushed higher because of higher logistics and personnel costs.
Baker Hughes’ competitors have also noted that higher costs of key raw materials is putting further pressure on margins as the fracking market has become more competitive due to a concentration of players in liquids rich plays.
Results from international markets should remain strong in Q1 because of high oil prices. Growing deepwater activity and the adoption of unconventional exploration in countries outside the U.S. will boost revenues from these markets. High oil and gas prices in international markets should result in higher rig count in 2012.
We will look to revise our 66.14 price estimate for Baker Hughes, which is at a 40% premium to its current market price.