Baker Hughes Q3 Preview: U.S Offshore Growth, Pumping Recovery And Middle East Operations Will Influence Results

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Baker Hughes (NYSE:BHI), one of the world’s largest oilfield services companies, is scheduled to release its Q3 2013 earnings on October 18. We expect the company’s quarterly performance to improve both sequentially and on a year-over-year basis aided by a gradual recovery in the North American pressure pumping business, growing activity and a shift to development drilling in the U.S. Gulf of Mexico and the possibility of higher earnings from operations in the Middle East/Asia Pacific region and Latin America. Here’s a quick look at what to expect when the company releases earnings Friday.

Trefis has a $50 price estimate for Baker Hughes, which is almost in line with the current market price.

Pressure Pumping Utilization Improvements And Price Stabilization

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Pressure pumping, a service which is largely used to perform fracking of shale gas wells, is one of Baker Hughes’ most important businesses in North America, contributing close to 25% of the firm’s overall revenues. [1] The market for pumping services has been weighed down of late as low natural gas prices and oversupply of pumping horsepower impacted pricing. However, over the first half of this year, Baker Hughes reported an improvement in this business with demand and capacity utilization rates improving significantly although pricing continued to remain low. However, the company expects pricing to stabilize going forward, and we believe that the stabilization coupled with operational improvements such as 24-hour fracking jobs and cost improvements such as using cheaper natural gas instead of diesel to power fracking trucks should have a positive impact on the firm’s North American margins.

Rising Rig Count In The U.S. Gulf Of Mexico, Shift Towards Development Drilling

The U.S. Gulf of Mexico has witnessed a surge in activity of late and Baker Hughes said that its revenue from the region touched its all-time high during the second quarter. At the end of September, there were a total of 62 offshore rigs working in the Gulf of Mexico, up by nearly 30% since the last year.  ((Baker Hughes North America Rig Count)) There has also been a shift from exploratory drilling to development drilling in the Gulf, and we believe that this could be advantageous to Baker Hughes given its relative strength in the completion and production space of the oilfield services market.

International Operations: Asia Pacific And Middle East Segment Should Do Well

Baker Hughes’ operations in the Middle East and Asia Pacific have been doing quite well lately, owing to increased activity in countries such as Saudi Arabia, Malaysia, Vietnam and Australia. During the second quarter, revenues from the region grew by around 21% over the last year to about $971 million, while profits before taxes rose by 32%.  Although the average rig count in the Middle East and Asia Pacific region has fallen from around 620 rigs in Q3 2012 to around 614 rigs in Q3 2013, we believe that margins could see some improvement as the firm has been focusing on ramping up its unconventional gas activity in Saudi Arabia after mobilizing its second pressure pumping fleet into the region during Q2. Additionally, the company’s operations in Iraq, which have so far been loss-making, are also on the road to recovery and are expected to begin contributing to earnings later this year. [2]

The Latin American business is also expected to have improved as Baker Hughes started some new projects in the region during the third quarter. Additionally, costs are also expected to be lower than in the second quarter when the company incurred significant demobilization costs in Brazil.

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Notes:
  1. Howard Weil Oilfield Services Factbook []
  2. Seeking Alpha []