Baker Hughes’ 3Q’16 Earnings To Drop Despite A Rise In The Global Rig Count

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Baker Hughes Incorporated
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Despite a notable rise in the global rig count during the September quarter, the market expects Baker Hughes (NYSE:BHI), the world’s third largest oilfield services company, to report weak earnings on 25th October 2016 [1]. Baker Hughes has faced a severe contraction in its margins since the beginning of the year due to the pricing pressure in the industry. This trend is likely to continue in the third quarter as well, and the oilfield contractor is expected to post heavy losses in the quarter.

BHI-Q&A-3Q16

Key Trends In The Third Quarter

The commodity prices, particularly natural gas, have shown strong signs of recovery in the last three months. The Henry Hub natural gas price, a benchmark for gas prices, grew almost 35% during the quarter. Even though crude oil prices remained flat during this period, the unexpected recovery in oil prices in the second quarter, led to a notable rise in the global rig count (oil and gas). This recovery was driven by the rise in rig demand in the North American and Middle East markets, while the Latin American and European markets continued to be a drag on the overall rig count.

HAL-Q&A-3Q16-1

While the global rig count improved almost 9% sequentially in the third quarter, Baker Hughes will continue to witness a decline in its top line as well as profitability. This is because the oilfield contractor is unable to negotiate higher pricing with its customers, unlike its competitors, Schlumberger and Halliburton. The company’s management is aware of its shortcoming, and had hinted about a weak second half of 2016 in its second quarter earnings call.

HAL-Q&A-3Q16-2

However, Baker Hughes continues to make efforts to weather the current commodity trough, through its three-point strategy. Under this strategy, the company is working towards improving its operational efficiency by simplifying its organizational structure and controlling its operational costs. The Houston-based company aims to reduce its operating costs by $500 million by the end of 2016, and focus on product innovation and rationalization of a full-service model to enhance its return on invested capital. Further, the company plans to repurchase $1.5 billion worth of its common stock, repay $1 billion of long-term debt, and refinance its $2.5 billion credit facility over the next couple of quarters. Despite these efforts, we expect Baker Hughes’ 3Q’16 earnings to decline and remain low for the remaining half of 2016.

See Our Complete Analysis For Baker Hughes Here

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Baker Hughes

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Notes:
  1. Baker Hughes To Announce Third Quarter 2016 Results, 21st September 2016, www.bakerhughes.com []
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