Baker Hughes Q4 Preview: North America To Drive Results, Expect A Tough Outlook

Baker Hughes (NYSE:BHI), the third largest oilfield services provider, is set to publish its Q4 2014 earnings on January 20, reporting on a quarter that saw benchmark crude oil prices decline by about 40%. We don’t expect the current crude pricing environment to have worked its  way into the company’s results for the quarter, given the contract driven nature of the services industry. However, the company’s near-term outlook looks challenging, amid upstream capex cuts and a dimmer outlook for exploration and production activity. For Q4, we estimate that the company could see earnings growth, driven by higher activity in regions such as the Permian Basin in the United States and the Asia Pacific region, although this could be partially offset by a weaker performance in markets such as Russia. In this note, we take a look at what to expect when Baker Hughes reports earnings Tuesday.

Trefis has a $70 price estimate for Baker Hughes, which is about 30% ahead of the current market price.

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We expect the company’s North American operations to be a key driver of fourth quarter earnings, with both margins and revenues from the region rising on a year-over-year basis. Oilfield services activity in the U.S. is likely to have remained strong through Q4, with the company reporting that a total of 9,544 onshore wells were drilled in the United States, marking a 5% year-over-year increase, while the average rotary rig count has also risen by about 8%. Product lines such as pressure pumping are likely to have seen strong activity, owing to growth in unconventional exploration and production activity in areas such as the Permian basin. On the international front, the company’s Middle East and Asia Pacific segment could benefit from higher offshore drilling activity in Asia, year end product sales and the completion of the demobilization of a large turnkey contract during Q3. ^[1] Earnings in the Europe/Africa/CIS division could be driven by higher year end product sales, although activity in Russia is likely to have taken a hit owing to the economic sanctions and the weak Russian ruble. The company’s Latin American operations could also see higher revenues owing to higher activity in offshore Mexico as well as due to a new contract for drilling services in Brazil, which is expected have commenced in December.

Difficult Outlook For The Industry

Benchmark Brent crude oil prices have fallen to levels of below $50 per barrel, touching six year lows, owing to sluggish outlook for global oil demand growth and strong supplies from U.S. shale oil fields. Prices could remain under pressure through 2015 as well, due to further growth in U.S. production, and analysts at Goldman Sachs have lowered their three-month price forecast for Brent to $42 a barrel. ^[2] The near-term situation doesn’t bode well for the oilfield services industry, since oil and gas companies are seeing their cash flows come under pressure, leading them to cutback on their capex budgets for 2015. Activity directed towards tight oil plays is likely to take the largest cut, given the higher marginal production costs and shorter investment planning cycles. This is likely to weigh on Baker Hughes’ top line and margins going into 2015, given its exposure to the pressure pumping product line (over 20% of total revenues). Additionally, since the industry is largely contract driven, customers could have better leverage in contract negotiation and extensions for services across the board. Baker Hughes has agreed to be acquired by larger rival, Halliburton (NYSE:HAL), pending approval from the shareholders of both companies and government authorities. We believe that the acquisition should help the companies better weather the market downturn given the synergies and improved competitive positioning that could come with a business combination.

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1. Baker Hughes’ (BHI) CEO Martin Craighead on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
2. Oil prices extend falls; Goldman Sachs slashes price forecasts, Reuters, January 2015 [↩]