We reaffirmed our Neutral recommendation on
), one of the largest oilfield service companies in the world, on
May 2, 2013. Operational efficiencies in Iraq drove margin
improvement. However, high mobilization costs for the newly
integrated drilling services in Norway restricted earnings. The
company holds a Zacks Rank #3, which is equivalent to a
short-term Hold rating.
Baker Hughes' strong portfolio of products and services should
help it post better-than-average results in North America and
enable it to further expand in the international markets. The
company also has a competitive set of technologies, which allows
it to bolster its activity in the deepwater Gulf of Mexico (GoM).
The company has successfully introduced products such as the
AutoTrak Rotary Steerable System and advanced completion systems
in regions that have a meaningful impact on its earnings and cash
In 2013, management believes the Middle East/Asia Pacific, and
Europe/Africa/Russia/Caspian regions, in particular Iraq and
Saudi Arabia, are likely to be the primary growth drivers. Saudi
Arabia is expected to drive the earnings of the Middle East/Asia
Pacific segment, while Norway is likely to witness operational
growth and margin improvement. North America also witnessed
improvement in earnings during the quarter mainly on better
utilization of pressure pumping in the U.S. and stepped up
activity in Canada.
Baker Hughes has taken effective steps for the nagging pricing
weakness in the pressure pumping market in North America. As part
of the effort, it has trimmed its 2013 capex estimate by 30% to
$2 billion, on an annualized basis. With lower capital spending
expected this year, we believe the company will be able to
generate free cash flow and begin to repurchase shares more
However, Baker Hughes' first quarter earnings fell 24.4% from the
year-ago level. The underperformance mainly stemmed from seasonal
weakness, in particular the Europe/Africa/Russia/Caspian segment.
Moreover, weak activity in several important markets of Baker
Hughes resulted in an unfavorable mix. We remain apprehensive
about the reduction in rig activity levels in 2013 and the
company's broad exposure to pressure pumping, which could affect
earnings going forward.
Other Stocks to Consider
While we prefer to remain on the sidelines for Baker Hughes,
there are other stocks in the sector that appear rewarding. These
Dawson Geophysical Company
SM Energy Company
Exterran Holdings, Inc.
), which are expected to perform impressively over the next few
months and carry a Zacks Rank #1 (Strong Buy).
BAKER-HUGHES (BHI): Free Stock Analysis
DAWSON GEOPHYS (DWSN): Free Stock Analysis
EXTERRAN HLDGS (EXH): Free Stock Analysis
SM ENERGY CO (SM): Free Stock Analysis Report
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