Baker Hughes Has A Good Quarter On Recovering North American Business, Strong International Activity

Baker Hughes (NYSE:BHI) released its third quarter earnings on October 18, posting a strong set of results that were driven by a recovery in the company’s North American pressure pumping operations, strong activity in the Middle East and Asia as well as the North Sea. While quarterly revenues rose 8% year-over-year to around $5.8 billion, operating income surged 18% to about $576 million. Profit before tax margins also rose to around 11% from about 10% in  Q3 2012 and 9% in Q2 2013. ^[1] In this note, we take a look at some of the factors that influenced the company’s performance over the quarter and what to expect going forward.

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Baker Hughes’ North American business saw its revenues rise by around 4% over the last year to around $2.85 billion while profit before taxes grew by around 2%. While margins were slightly lower than last year, they improved sequentially. The pressure pumping product line, which contributes almost a quarter of the company’s overall business, continued to witness a recovery despite the oversupplied market,  thanks to improving operational efficiencies as well as better asset utilization. Baker Hughes has undertaken initiatives to streamline its supply chain for the pressure pumping  service and has also been transitioning a portion of its pumping fleet to operate on cheaper natural gas in addition to diesel. However, things could remain challenging on the pricing front over the near term, since the company estimates that the market is still oversupplied by around 20% and expects the overhang to continue into 2014 as well.

The U.S. Gulf Of Mexico, which has been one of the bright spots in the North American oilfield services market over the past few quarters, saw some reduction in activity due to the hurricane season, causing Baker Hughes’ revenues from the region to decline sequentially. However, this decline in activity was partially offset by an improved activity mix as well as the adoption of the company’s newly introduced wire line technology by several deepwater rigs in the region. ^[2] Baker Hughes expects drilling activity in the Gulf to remain strong through the fourth quarter, excepting the activity delays due to a tropical storm earlier this month.

International Operations Drive Overall performance

Baker Hughes’ international business had a record quarter thanks to robust drilling activity in the company’s Middle East and Asia Pacific segment, particularly for drilling services in China, Southeast Asia and the Arabian Gulf. The company also benefited from from the early delivery of a specialized completion system which was initially scheduled to be delivered over Q4. Overall, global drilling activity has remained strong with the average quarterly rig count during the third quarter growing by over 2% year-over-year, while upstream capital spending has also been expanding. Global exploration and production capital expenditures are expected to grow by around 18% in 2013 to about $850 billion. ^[3] Looking ahead, the company expects the international rig count to grow over the third quarters numbers with the  largest increases coming from Africa, Europe and the Middle East.

Trefis will be updating its Baker Hughes model and price estimate to incorporate the quarterly earnings.

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1. Baker Hughes Press Release [↩]
2. Seeking Alpha [↩]
3. PR Newswire [↩]