Baker Hughes Q1 Results Driven By Eastern Hemisphere Activity

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Baker Hughes (NYSE:BHI), the world’s third largest oilfield services company, reported a strong set of Q1 2014 earnings on April 17, beating market expectations. The results were driven by a strong performance (year-over-year) in the Eastern Hemisphere and the U.S. Gulf of Mexico, although this was partially offset by lower business in Latin America. The company’s revenues grew by around 9.5% year-over-year to $5.73 billion, while adjusted net income rose by around 27% to $369 million. [1] In this note, we take a look at some of the factors that influenced the company’s operations in the Eastern Hemisphere, where much of its top-line growth has been coming from of late.

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Trefis will be updating its $56 price estimate for Baker Hughes, to account for the earnings release.

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Eastern Hemisphere Continues To Drive Results

While upstream activity in the Western hemisphere has been somewhat sluggish due to a slowdown in Latin America and middling growth in North America, the Eastern Hemisphere has proved to be a key earnings driver for most large oilfield service companies. During the first quarter, Baker Hughes saw its revenues from this region rise by around 20% year-over year to about $2.10 billion, while profit before taxes expanded by about 33% to $277 million.

Strong Deepwater Activity in West Africa: West Africa  is emerging as one of the world’s most important deepwater drilling markets after the U.S. Gulf of Mexico, as proven oil and gas reserves in the region have been rising and more international oil companies have been building up interests. [2] The overall offshore rig count in Africa has grown  by roughly 5% year-over-year and Baker Hughes indicated that it has been seeing increasing activity in many markets in the region. For instance, the company said that it had won new contracts in the deepwater market in Angola and Ghana and was also deploying new technologies in Nigeria. We believe that the region could play larger role in driving Baker Hughes’ profit margins growth going forward, since services for deepwater wells are often more lucrative compared to conventional wells, given the high levels of technology and risk involved.

Lower Losses In Iraq : While Baker Hughes has been undergoing a learning curve of sorts in Iraq, we believe that the oilfield services market in the region holds long term promise. Iraq is estimated to have the world’s 5th largest petroleum reserves, and is one of the few places in the world where a bulk of the reserves may have been barely harnessed. [3] While the Iraqi operations continue to be dilutive to Baker Hughes’ overall earnings, the company said that the losses were declining and this is likely to have had a positive effect on the company’s results for the quarter. The company has indicated that it expects margins for Iraq to improve going forward. [4]

Growth In The Asia-Pacific Region: While the average quarterly land based rig count in the Asia-Pacific is down by around 3% year-over-year, the offshore rig count has expanded by 17%, driven by higher activity in markets such as such as China, Malaysia, Vietnam and Australia. During the quarter, Baker Hughes indicated that it had seen strong demand for its drilling services and fluids product line from markets such as Malaysia and Australia. The company had previously indicated that it was gaining market share in Australia’s expanding deepwater market and also mentioned that it had entered into a long-term agreement with PETRONAS Carigali to enhance production in mature fields in offshore Malaysia. [5]

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Notes:
  1. Baker Hughes Q1 2014 Earnings Press Release, April 2014 []
  2. West Africa starts opening up more deepwater oil, gas plays, Platts, January 2014 []
  3. Iraq Country Analysis, U.S. Energy Information Administration []
  4. Baker Hughes Q1 2014 Earnings Call Transcript, Seeking Alpha []
  5. Baker Hughes Q4 2013 Earnings Call Transcripts, Seeking Alpha, January 2014 []