2015 Earnings Review: A Tough Year For Baker Hughes Due To Weak Drilling Demand

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As expected, Baker Hughes (NYSE:BHI), the world’s third largest oilfield services contractor, announced a rough set of 2015 results recently, largely due to the sluggish North American drilling demand, driven by the ongoing oil slump [1]. The Houston-based company suffered a sizeable decline in its top line as oil and gas companies continued to hold back their exploration and production activities amid depressed commodity prices through 2015. Further, despite its efforts to contain its operating costs by right-sizing its organizational structure, the oilfield service contractor’s earnings experienced a sharp drop both sequentially and annually, due to the unfavorable pricing environment in most of its markets. As the outlook for commodity markets remains challenging, we foresee a further decline in Baker Hughes’ top line as well as earnings, due to the unprecedented decline in oil prices, and, in turn, in drilling activity. In this note, we present a quick recap of the company’s 2015 earnings release and its outlook going forward.

BHI-HAL-2016

Source: Google Finance

Weak Drilling Activity Creates A Dent In The Revenue

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The steep fall in commodity prices since July 2014 caused the oil and gas companies to cut back their exploration and production budgets during 2015. This led to a sharp fall in the drilling demand across the globe, resulting in a 35% drop in the rig count worldwide. Consequently, Baker Hughes’ consolidated revenue, much like its peers, fell to $15.7 billion, almost 36% lower on a year-on-year basis. The company’s North American revenue declined more than 50%, due to a 62% drop in the US rig count. However, unlike its rivals who saw resilience in their international markets, the oilfield major’s international revenue slipped to $8.5 billion, representing a fall of 23% as opposed to the 13% decline in the rig count during the year.

BHI-rev15

 

Margins Contract Despite Cost Reduction Measures

Even though Baker Hughes remained focused at managing its cost structure, and strategically targeting revenue opportunities, it suffered a net loss of $2 billion, or $4.49 per share in 2015, as compared to a net profit of $1.7 billion, or $3.93 per share in 2014. This loss was driven by a one-time impairment and restructuring charge of $2 billion that the company had to undertake due to the deteriorating market conditions during the year.

BHI-profit15

Going Forward

Baker Hughes acknowledges that the outlook for commodity markets will remain challenging through 2016. Consequently, it expects the global drilling activity to continue to decline in the next few quarters, as the oil and gas companies are expected to reduce their costs while enhancing their production from the existing wells. Although Baker Hughes remains optimistic about capitalizing on the new opportunities to optimize cost for its customers, we foresee a further decline in the company’s top line, as well as bottom line, driven by the current commodity downturn.

 

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Notes:
  1. Baker Hughes Announces 2015 Numbers, 28th January 2015, www.bakerhughes.com []