Baker Hughes Inc. (BHI) reported first quarter 2012 earnings of 86 cents a share, which beat the Zacks Consensus Estimate of 83 cents. However, the quarterly results were below $1.22 earned a year ago.
Revenue shot up more than 18% year over year to $5,355 million in the quarter from $4,525 million in the first quarter of 2011. The top line also exceeded the Zacks Consensus Estimate of $5,259 million.
During the reported quarter, the company experienced lower margins in North America compared to the preceding quarter. The factors contributing for the decline were strains in the Pressure Pumping product line, the challenges faced in the rapid shift from natural gas to oil-directed drilling rig activity and the oversupply of Pressure Pumping across the market as well as the supply chain issues. Excluding Pressure Pumping, all other groups – Drilling, Evaluation, Completion and Production showed steady improvements. Internationally, the company experienced solid top-line growth due to robust performance across all regions.
Segmental Highlights
Of Baker Hughes’ total quarterly revenue, North America, Europe/Africa/Russia/Caspian, Middle East/Asia-Pacific and Latin America accounted for 53%, 17%, 14% and 11%, respectively. The remainder was generated by the Industrial Services segment.
A strong improvement in before-tax profit was noticed in Europe/Africa/Russia/Caspian during the quarter, which recorded a profit before-tax margin of 17% versus 11% in the year-ago quarter. Pre-tax margin in North America came in at 14%, compared with 19% in the year-earlier quarter.
Latin America recorded profit before-tax margin of 12% as against 13% in the year-ago quarter, while it was 10% in Middle East/Asia-Pacific (down from 12% in the first quarter 2011). The Industrial Services segment’s margin was 8% compared to the prior-year figure of 9%.
Liquidity
At the end of the first quarter, Baker Hughes had $780 million in cash and cash equivalents, while long-term debt was $3,843 million, representing a debt-to-capitalization ratio of 19.0%. Net cash flow used by the operating activities in the first quarter was $76 million compared to net cash flow provided by the operating activities of $76 million in the prior year quarter. The company’s capital expenditures were $671 million during the reported quarter.
Our Take
Houston, Texas-based Baker Hughes, the world’s third-largest oilfield services provider, is favorably positioned with significant improvements in activity levels in both North America and the international regions. The company’s strong portfolio of products and services will help it generate better-than-average results in the domestic market and enable it to further penetrate in the international markets. In this respect, Europe/Africa/Russia Caspian segment posted outstanding results, contributed by the robust performance across Africa in numerous high-profile exploration wells in Nigeria, Angola and Mozambique. During the reported quarter, Baker Hughes’ also started operations in Iraq which is likely to augment earnings further in the coming quarters.
The company also has a competitive set of technologies, which allows it to pursue deepwater activity in the GoM. The latest addition to its fleet – Blue Orca -adept at supporting offshore completion operations and geared to carry on high-rate and high-volume multi-zone fracturing operations will boost deepwater exploration upon its completion in late 2013.
The company expects its worldwide demand to improve further, particularly in China, India, and other developing nations of Asia and the Middle East, which will in turn boost its international spending. Activity is also expected to climb in 2012 led by the steady improvement in Latin America, Middle East and the deepwater markets and will consequently support pricing improvements. Baker Hughes remains committed to enhancing its international operations.
However, Baker Hughes, pointed out that pricing pressures, supply chain and raw material constraints, as well as implementation issues will likely weigh on its pressure pumping business in North America through the second half of this year.
Baker Hughes holds a Zacks #5 Rank, which is equivalent to a Strong Sell rating for a period of one to three months. We maintain a long-term Neutral recommendation on the stock. The company faces competition from the heavyweight Schlumberger Ltd. (SLB).
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