Baker Hughes Reports Solid Q4 Growth, Weak Crude Prices Dim Outlook

Baker Hughes (NYSE:BHI) published its Q4 2014 earnings on January 20, reporting on a challenging quarter for the broader oil and gas industry that saw crude oil prices decline by close to 40%. The downturn in the oil markets didn’t reflect on Baker Hughes’ Q4 earnings, since customers are likely to have stuck to executing on their 2014 capex budgets. Quarterly revenues grew by around 13% year-over-year to $6.64 billion owing to higher activity in North America and strong year-end product sales in international markets. Pre-tax margins also rose from around 10% in Q4 2013 to 16% driven partly by improvements in the company’s pressure pumping product line. ^[1] However, the company’s outlook for 2015 looks challenging, as customers cut back on their upstream capital spending and push for better pricing. Here are some of the key takeaways from the company’s earnings release.

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

Trefis has a $70 price estimate for Baker Hughes, which is about 25% ahead of the current market price.

Pressure Pumping, Year-End Product Sales Drive Results

Baker Hughes’s North American operations, which account for about half of the company’s revenues, had a strong quarter, with revenues growing by 20% year-over-year to $3.30 billion, while margins rose to about 15% from 8% a year ago. The pressure pumping product line did particularly well, witnessing higher utilization levels and improved pricing. The company noted that pumping margins hit three-year highs during the quarter. Baker Hughes has been seeking to increase the competitiveness of its pumping line over the last few years by improving the supply chain while also deploying new and more efficient equipment. The company’s other product lines, including artificial lift, upstream chemicals, completion systems and drill bits, also saw strong sales during the quarter. Growth was strong in international markets as well. The Middle East/Asia Pacific segment saw revenues grow by 13% to $1.22 billion while pre-tax margins soared to 19% from about 8% a year ago.  Key drivers of the segment’s results included a favorable mix of year end product sales and record levels of revenue for the drilling services, artificial lift and pressure pumping product lines. Earnings from the Latin American market also grew, owing to strong year end product sales to the Andean region and higher drilling service activity in Brazil.

Expect Reduction In U.S. Rig Count, Weaker Oilfield Services Activity

Crude oil prices have fallen to levels of below $50 per barrel, touching six year lows, owing to a sluggish outlook for global oil demand growth and strong supplies from U.S. shale oil fields. Prices could remain under pressure through this year, due to further growth in U.S. production. Oil and gas companies will scale back on their capital spending to operate within their currently constrained cash flows, leading to a weak outlook for oilfield services activity. While many large players have yet to provide their capex guidance for 2015, companies that have published capex guidance indicate that cuts of 20% and upwards could be the norm across the industry. While Baker Hughes is likely to witness a decline in demand for its products and services, pricing is also likely to come under significant pressure as oil companies will have significant leverage in contract negotiations and renewals. Activity declines are likely to be the largest in the North American land market, given that production growth has largely been driven by high-cost tight oil production. The company expects the average U.S. rig count in the first quarter to be roughly 15% lower than the Q4 2014 average. ^[2] Rig count declines are expected in international onshore and offshore markets as well, although the rate of decline is likely to be slower when compared to the North American market. The company has noted that it intends to lay off 7,000 employees, mostly in the current quarter, while also expecting to book a one-time charge of between $160 million to $185 million related to severance.

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 Q4 2014 Press Release [↩]
2. Baker Hughes’ (BHI) CEO Martin Craighead on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, January 2015 [↩]