We have upgraded our recommendation on Texas-based
Baker Hughes Inc.
) to Neutral from Underperform. Baker Hughes is the world's
third-largest oilfield services provider - after
A series of contract wins and integrated drilling services has
placed the company well in the emerging markets of Gulf of Mexico
(GoM) and North Sea. The company is also gaining traction in the
Middle East and unconventional markets in Saudi Arabia. The
company's effort to reform its pressure pumping business in the
US, along with expectations of improved international margins
will likely boost its revenues going forward.
Among the diversified oilfield service players, Baker Hughes is
well positioned with an expectation of significant improvement in
activity levels in both North America and international regions.
We believe that Baker Hughes will benefit from two positive
aspects that should boost the global oil service business. The
first is a structural shift in North America, mainly benefiting
from the integration of BJ Services business, and the other is an
Both oil and natural gas-directed drilling increased from the
tough levels witnessed in mid 2009 with majority of the recent
drilling being oil-directed. The increase in oil drilling was
supported by high commodity prices and the development of several
new oil shale plays. Incremental gas drilling was driven by
higher activity in the gas shale plays. Being one of the largest
oilfield service companies, Baker Hughes is capitalizing on these
However, Baker Hughes' third-quarter 2012 results suffered from
the discrepancies in the North American Pressure Pumping
business. Further, the company pointed out that pricing,
supply chain and raw material constraints, as well as
implementation issues will likely weigh on the pressure pumping
business in North America through the second half of 2012.
Besides, weak activity in several important markets for Baker
Hughes resulted in an unfavorable mix in the third quarter.
Internationally, the company's significant markets, like Brazil,
Colombia, and Norway, registered a 17% decrease in the rig count
In view of the above factors, we believe the stock will move
in line with the broader market indices.
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