Baker Hughes Q4: Results Weighed Down By Weather, But Pumping Improvements Are Positive


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Baker Hughes ( BHI ), the third largest oilfield services company, reported its Q4 2013 earnings on January 21. The company's quarterly revenues grew by around 1% sequentially to $5.86 billion, while pre-tax profit margins fell from around 11% in Q3 to 10% in Q4 2014. Although the company's international business did reasonably well, aided by a sequential improvement in profitability in Latin America as well as higher overall rig activity in the Eastern Hemisphere, the North American business proved to be dilutive to overall margins.  In this note, we take a look at some of the factors that influenced the company's performance in the North American geomarket and where the business could be headed in 2014.

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Weather Disruptions Weigh On North American Results: Baker Hughes derives nearly half of its revenues from the North American market. During Q4, the company saw its revenues from the region fall by around 4% sequentially to around $2.74 billion, while profit before tax margins contracted to about 8% from around 10% during Q3 2013. While the onshore business was impacted by colder than expected weather in the Southern and Western parts of the United States and a decline in the oil directed rig count in Canada, the offshore business saw its performance decline sequentially due to an unfavorable mix of product sales, storm related delays as well as due to a delay in a number of deepwater stimulation projects. ((Seeking Alpha))

Pumping Improvements Are Encouraging: Pressure pumping accounts for roughly a quarter of Baker Hughes' overall revenues, and pricing for the product line has remained challenging for most oilfield companies given the oversupply of capacity in the market. However, Baker Hughes has been relying on improving operational efficiencies in order to bolster margins for the product line. Among other initiatives, Baker Hughes has been converting some of its fracking trucks into bi-fuel, so that they can operate on both natural gas as well as diesel and has also been conducting more 24-hour frac jobs, in order to bring down the operating costs of fracking. These efforts are certainly paying off, as the company has reported that it has seen four consecutive quarters of margins improvement for the pumping product line.

Expect Activity Levels And Margins To Improve In 2014: For 2014, the company expects overall oilfield services activity to increase in the United States with the onshore well count rising by about 5% compared to last year, although the rig count will remain the same owing to higher rig efficiencies. The company also expects the U.S. offshore rig count to rise by around 5% to about 60 this year, as some new deepwater rigs are commissioned in the region. Additionally, we believe that the company could benefit from its strength in the stimulation or completions space, as activity in several parts of the Gulf shifts from drilling to completions activity. Overall the company expects its North American margins to improve this year and get to the "mid-teens" levels by the second half of the year. ((Seeking Alpha))

Trefis will be updating its valuation model and price estimate shortly for Baker Hughes to account for the company's earnings release.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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