Baker Hughes Q3 Driven By Strong Pumping Activity, U.S. Gulf of Mexico Weighs On Results

Baker Hughes (NYSE:BHI), the third-largest oilfield services company, reported its Q3 2014 result on October 16, posting reasonably strong growth that still came short of market expectations. The results were driven by higher rig activity and service intensity in the United States land market and recent contract wins in Latin America. However, this was partially offset by lower activity in the U.S. Gulf Of Mexico and also by some geopolitical turmoil in markets such as Iraq and Libya. The company’s adjusted net income grew by around 10% sequentially to about $447  million, while quarterly revenues grew by 5.3% to $6.25 billion. ^[1] Here are some the key takeaways from the company’s earnings release.

See Our Full Analysis For Oilfield Service Companies Halliburton| Schlumberger |Baker Hughes

Trefis has a $75 price estimate for Baker Hughes, which is about 44% ahead of the current market price.

North American Land Market Does Well, Offshore Downtime Hurts Margins

North America is Baker Hughes’ single largest geomarket. The company saw revenues from the region rise by around 11% sequentially to $3.15 billion, although profit before tax margins remained flat at around 12%. Pressure pumping emerged the strongest performing product segment, posting sequential revenue growth of around 25% over the quarter. The company’s pumping fleet has been witnessing full utilization rates of late, and the service intensity for pumping operations has also been increasing owing to longer lateral sections of wells and higher stage counts for fracking operations. The company is also operating about 70% of its pumping fleet on 24-hour operations, which should help to improve operational efficiency and profit margins. Pricing for pressure pumping services, which had been a key concern in the past, has also been improving owing to the tighter supply-demand balance for pumping capacity the market.

For the quarter, the company witnessed a decline in revenues from the U.S. Gulf of Mexico – its most profitable geomarket – due to abnormally strong ocean currents which forced many of its key customers to suspend their operations. This brought about a decline in well-construction activity as work on 13 deepwater rigs was delayed. The company ‘s North American margins would have been 150 basis points higher if not for the interruptions. However, the company expects activity to return to normal levels by the fourth quarter, resulting in a meaningful sequential increase in revenues and margins from the North American market.

Oilfield Activity Could Decline If Crude Oil Prices Fall Below $75

Brent crude, the global benchmark for crude oil, has approached 4-year lows of around $83 a barrel, owing to concerns of slowing consumption growth, strong supply from U.S. shale oil fields and a recovery in production in Libya. The current pricing environment has been weighing significantly on the stock prices of most oilfield services firms, amidst concerns that exploration and production activity and upstream capex spending could take a hit if oil and gas companies face revenue pressures. ^[2] Baker Hughes’ stock has been particularly badly hit, falling by close to 30% over the last 3 months. However, the company does not expect a decline in oilfield activity at current oil prices, noting that its core customers would likely reconsider their projects only if oil prices fell and remained below $75 per barrel over a period of several months. If prices were to decline to these levels, we believe that areas such as shale and tight oil –  which typically have shorter project lead times and  higher per-barrel production costs – could see a pullback in activity. However, deepwater projects, which typically have longer production horizons and planning cycles, may not be impacted materially by variations in oil prices. ^[2]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Baker Hughes Press Release, Baker Hughes, October 2014 [↩]
2. Baker Hughes’ (BHI) CEO Martin Craighead on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [↩] [↩]