Baker Hughes Results Pinched By Weak Pressure Pumping Market

by Trefis Team
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Baker Hughes Incorporated
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Baker Hughes (NYSE: BHI), one of the world’s largest oil field service providers, released its Q4 earnings yesterday reporting a mixed set of numbers. While quarterly revenues remained relatively stable compared last year, the firm’s income from continuing operation declined by around 36% due to a weaker performance in the North America. [1] However, there were bright spots in the firm’s earnings release with some of the firm’s international segments posting solid growth, signs of better control of efficiency and input costs in North America and a better performance in the U.S. Gulf of Mexico.

Here are the key takeaways from the firms earnings release. (See Also: Baker Hughes Q4 Preview: Cost Cutting And Overseas Operations In The Spotlight)

North America Continues To Drag Down Performance

More than half of the firm’s business comes from North America, a market that has been impacted by a slowdown in natural gas drilling and an oversupply of pressure pumping equipment over the last few quarters. This grim situation persisted into Q4 as well with revenues from the region declining by 6% while profits before tax fell by around 47%. The firm has been the worst hit by the downturn in the U.S. drilling market with its stock falling by around 8% since last year while its larger rivals Halliburton (NYSE:HAL)  and Schlumberger (NYSE:SLB) have seen their stocks rise by around 5% in the same period.

Pressure Pumping Remains Lackluster But Operational Improvements Are Encouraging: While the gas rig count in North America remained relatively stable thorough the fourth quarter, the firm’s pressure pumping product line continued to face margin pressures with pricing degrading further. However, this was partially offset by better operational efficiency and control of input costs. The firm now operates around 40% of its fracking fleet on 24-hour shifts and has also been partially substituting guar gum, an input used in the fracking process with cheaper alternatives.

U.S. Offshore Remains Upbeat: The firm put up a solid performance in the U.S. Gulf of Mexico with revenues growing by over 30% for the year, outpacing the 22% growth in the rig count thanks to better pricing on contracts and market share gains. The Gulf of Mexico is emerging one of the hottest markets for deepwater exploration as stable oil prices and the need for energy independence in the U.S. are driving oil firms to explore offshore. Offshore and particularly deepwater exploration are more technologically challenging and usually garner better margins.

Low Commodity Prices Cause Canadian Operations To Falter:  Operations in Canada were impacted in Q4 as a major customer shut down its drilling and completion operations this quarter.  The broader Canadian drilling market has been experiencing a slowdown as oil and gas companies been curtailing capital budgets to conserve cash as they grapple with volatile prices for heavy oils and natural gas. January and February are the typically the strongest months for drilling in Canada, and if the sluggish trend persists into this quarter as well, it could impact Q1 earnings.

Well Rounded Performance In International Markets

The firm’s international operations helped to partially offset a weaker performance in North America. Revenues grew by around 8% while profits before taxes for improved by around 38%.

Europe/Africa/Russia Segment Puts Up A Strong Performance: This geographic segment witnessed profit growth of nearly 70% thanks to strong year-end product sales in Africa and Russia and activity gains in Continental Europe. In Africa, the firm has benefited from increased activity in Mozambique, new facilities in Pemba and its strong position in Nigeria, the Ivory Coast and Angola.  ((Seeking Alpha Earnings Call Transcripts)) The overall rig count in Africa grew by around 30% through last year as big oil and gas companies have been scaling-up their presence in this vast, relatively under-tapped market.

Operations In Iraq pick Up: Revenues in the Asia Pacific and Middle east region grew by around 15% compared to last year while profits grew by 16% on the back of a better performance in Iraq, the Arabian Gulf and Australia. Although Iraq has been a source of margin contraction for Baker Hughes over the last few quarters due to high mobilization and start-up costs, it is a strategically important market for the firm given its massive and under-exploited hydrocarbon reserves. The firm mentioned that it currently has 7 operational rigs in the region, and could add two more this quarter and expects profitability to improve in this region by the end of this year. The firm is also building integrated operations in the region, which would provide a suite of  oil field services along with project management expertise.

Outlook For 2013

Baker Hughes expects a reduction in North America onshore drilling spending this year; however, this could be more than offset by growth in the Gulf of Mexico and in international markets. Pressure pumping in North America could again come to determine profitability in the region as the firm estimates that there is up to 25% of excess capacity in the U.S. alone. We believe that the chances of a complete reversal occurring in 2013 are highly unlikely given that an additional 300 rigs may be required to absorb this excess pumping capacity. The firm will be pruning its capital expenditure for the year by around 30%, to around $2 billion, with North American CapEx taking the largest cut.

We are in the process of revising our $54 price estimate for the firm following the earnings release.

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Notes:
  1. Baker Hughes Press Release []
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