Trends That Could Drive Baker Hughes’ Q1 Earnings

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Baker Hughes (NYSE:BHI), the world’s third-largest oilfield services company, is expected to release its Q1 2014 earnings on April 17. We expect the company’s earnings to improve on a year-over-year basis, driven by stronger exploration and production activity in international markets and parts of North America. During Q4 2014, the company’s revenues grew by around 1% sequentially to $5.86 billion, while pre-tax profit margins fell from around 11% in Q3 to about 10%. Below we take a look at some of the factors that could drive the company’s performance for this quarter.

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Growing Capital Spending By Oil Cos. And A Higher International Rig Count: Oil companies have been boosting their capital spending, driven by a recovering global economy, rising oil demand  and stable crude oil prices. According the Global 2014 E&P Spending Outlook published by Barclays in December 2013, global exploration and production spending is expected to grow by around 6.1% to a record $723 billion in 2014. Oilfield services companies such as Baker Hughes could be the biggest beneficiaries of this growth, since the overall spending mix is expected to move away from large infrastructure projects towards well services such as drilling, evaluation and completions. This trend has been visible in the international rig count, which grew by an average of around 5% year-over-year to about 1,337 rigs during Q1. [1]

Eastern Hemisphere Activity: Oilfield services companies have been witnessing strong momentum  in the Eastern Hemisphere, owing to higher activity in regions such as Africa, the Middle East and Asia. During 2013, much of Baker Hughes’ revenue growth came from the Eastern Hemisphere, and we think that the region could continue to be an important contributor to the company’s earnings growth.  The company could benefit from stronger offshore activity in Western Africa, where it has been mobilizing additional equipment and also seeing increasing contracting activity. [2] Baker Hughes could also see higher activity (year-over-year) for its Asia-Pacific business segment, on the back of  some market share gains in Australia’s expanding deepwater market, as well as due to a long-term oilfield service agreement that it entered into with PETRONAS Carigali to enhance production in mature fields in offshore Malaysia. [3]

North America Could Benefit From GoM, Internal Improvements To Pumping Business: We believe that the company’s pressure pumping business and higher activity in the offshore U.S. Gulf of Mexico are likely to be two key growth drivers for the North American business this quarter. Activity in the Gulf of Mexico is expected to have been strong through this quarter, as the average rig count in the region rose from around 50 in Q1 2013 to about 54 in Q1 2014. Additionally, Baker Hughes could also benefit from its strength in the stimulation and completions space, as activity in several parts of the Gulf has been shifting from drilling to completions.

Baker Hughes’ pressure pumping business has also been seeing some margin expansion of late, owing largely to improvements in internal efficiencies. For instance, Baker Hughes has been converting some of its fracking trucks into bi-fuel (operating on both natural gas and diesel), as well as operating an increasing percentage of its  fracking fleet under 24-hour operations (which could help to cut down on manpower and operational costs). Additionally, the pumping business could benefit from higher service intensities, as as operators have been drilling longer lateral wells while also increasing the number of fracking stages for wells in order to maintain their production output.

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Notes:
  1. Rig Count, Baker Hughes []
  2. Baker Hughes Q4 2013 Earnings Call Transcripts, Seeking Alpha, January 2014 []
  3. Baker Hughes Awarded Long-term Contract with PETRONAS Carigali, PR Newswire, October 2013 []