Baker Hughes Reports Disappointing 2Q Earnings On Lower North American Drilling Activity

Baker Hughes (NYSE:BHI), which announced its second quarter results on Tuesday, July 21, reported an adjusted loss of 14 cents per share ^[1], missing the market estimate by 5 cents per share. Unlike competitors Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) that released better-than-expected earnings earlier this week, Baker Hughes posted an adjusted loss of 62 million, driven by lower drilling activity and high cost deflation in the North American markets. However, the oilfield services major managed to beat the analyst estimate for revenue of $3.88 billion by delivering consolidated revenue of $4 billion. Since the short term outlook for the oilfield services industry appears to be challenging, we expect Baker Hughes’ earnings to remain depressed even in the remaining half of the year, before its potential  merger with Halliburton materializes at the end of the year. Here are the key takeaways from the company’s second quarter results.

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Sluggish US Drilling Demand Drives Down Revenues

Given the sharp decline in the global rig count due to the pull-back in upstream spending by large oil companies, Baker Hughes reported consolidated revenue of $4 billion, down 33% annually or 13.6% sequentially ^[1]. The company’s North American revenues, which make up almost half of the total revenues, declined to $1.5 billion, a drop of 25% on a sequential basis, outperforming the 40% decline ^[2] in North American oil rig count during the latest quarter. The Latin American region and Europe/Africa/Russia Caspian region declined due to foreign currency headwinds, while the Middle East/Asia Pacific region suffered due to lower activity levels throughout Asia Pacific.

The unfavorable pricing environment, driven by the significant reduction in drilling activity, severely hit Baker Hughes’ earnings. The company posted an adjusted loss of $62 million or 14 cents, as operating losses from North American region more than doubled to 127 million during the quarter. However, higher international margins and cost reduction measures undertaken during the quarter softened the blow of the North American losses on the company’s bottom line.

Source: Baker Hughes Rig Count

Outlook

Based on the earnings release, Baker Hughes expects the North America drilling demand to remain weak in anticipation of depressed crude oil prices. However, the company highlighted that the seasonal activity in Canada is likely to partially offset the impact of the low drilling activity in the US. In addition, the company remains pessimistic on the international drilling demand for the rest of the year. Based on the company’s guidance, we expect Baker Hughes’ earnings to remain low, given its large exposure to the North American drilling market.

Source: Google Finance

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1. Baker Hughes Announces Second Quarter Results, 21st July 2015, www.bakerhughes.com [↩] [↩]
2. Baker Hughes Rig Count [↩]