Expect A Sharp Decline In Baker Hughes’ Q1 Numbers As Rig Activity Plummets

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Baker Hughes

Oilfield services major Baker Hughes (NYSE:BHI) is expected to publish its Q1 2015 earnings on April 21st, reporting on a tough quarter that saw a significant drop in oilfield activity amid upstream capex cuts and weak crude oil prices. We expect the firm’s quarterly numbers to decline meaningfully on a year-over-year and sequential basis given the lower rig activity, service cost deflation and its exposure to the North American tight oil market where a bulk of the cutbacks are taking place. While the turmoil in the oil markets began in the second half of 2014, it didn’t work its way into the Q4 2014 earnings of most oilfield services players, as customers executed as planned against their 2014 budgets. However, the Q1 results should give us better visibility into how the current downturn and spending cuts will impact earnings, going forward.

Baker Hughes is in the process of being acquired by larger rival Halliburton (NYSE:HAL). Shareholders of both companies have approved the deal, which is expected to close towards the end of this year, subject to regulatory approvals. The company will not be conducting a conference call to discuss its quarterly results, following a convention among companies being acquired in the energy industry. In this note, we take a brief look at some of the trends that will influence the company’s earnings for the quarter.

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Trefis has a $71 price estimate for Baker Hughes, which is about 7% ahead of the current market price. We will be updating our price estimate and rig count forecasts post the earnings release.

North American Land Business Will See The Biggest Cuts

Baker Hughes derives roughly half its revenues from the North American market. Oilfield activity in North America is primarily driven by shale and tight oil projects which have higher marginal costs of production (estimated break-even upwards of $60 per barrel) and shorter planning horizons that allow operators to respond to the commodity cycle more quickly. North American drillers, many of whom are highly leveraged, have rapidly cutback on rig activity to better manage their cash flows, causing the average North American rotary rig count to decline by about 27% year-over-year during Q1. The oil rig count in the United States is down by about 49% since the beginning of this year. This is likely to hit revenues and earnings as demand declines and as customers push for better pricing on contracts. However, international drilling activity has held up reasonably well, with the average international rig count declining by just about 5.5% year-over-year during Q1.

Revenue Mix Could Shift: Looking For Bright Spots On The Production Side

Baker Hughes’ drilling-related offerings such as directional drilling, drill bits and drilling fluids should see demand decline sharply, following the lower rig count. However, the results of production-related offerings – such as artificial lift, pressure pumping and completions solutions – could be somewhat mixed. While pricing and overall activity will certainly fall, there are likely to be some bright spots since oil and gas companies are looking to maximize productivity and flow rates on already drilled wells (related: Recent Trends In The U.S. Land Drilling Market: Re-fracking, Growing Well Inventory, Lower Rig Counts). This could incentivize them to focus a larger portion of their budgets on production-oriented services. For instance, service intensities for pressure pumping could increase (more fracking stages, higher volumes of proppant) while the trend of re-fracking wells is also likely to have gathered momentum. Pressure pumping is one of the company’s largest product lines, accounting for about 20% of total revenues.

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