Baker Hughes in Neutral Lane - Analyst Blog

We are maintaining our Neutral stance on Baker Hughes Inc. (BHI) following its impressive third quarter results, strong North American land business as well as a well-rounded suite of product offerings.

Baker's earnings saw a more than three fold jump in the recently concluded quarter, driven by strength in the US Land market and seasonal recovery in Canada. Notably, the third quarter was the first full quarter following the acquisition of BJ Services. We believe the integration will likely lead to further revenue streams and margin expansion as cost and revenue synergies are realized.

Baker is a leading integrated oil services company with a suite of offerings, which is expected to deliver growth going forward. Pressure pumping continues to be one of the tightest service offerings in North America and Baker Hughes has seized this favorable trend with the integration of strong pressure pumping exposure from BJ Services.

However, we believe that reduced activity in the Gulf of Mexico (GoM) may offset the strength in the North American land business in 2011. Activity in the GoM is expected to remain slow in the post-moratorium period due to a deferred permitting process and more stringent regulations.

The company's international profitability materially lagged its peers, such as Halliburton Co. (HAL) or Schlumberger Ltd. (SLB), in the third quarter and lacked visible progress. However, the company expects global economic expansion to increase demand for oil and drive growth in international markets going forward. Moreover, Baker expects international margins to climb to 15% in the fourth quarter of 2011. Recently, Baker has opened a new facility in Welshpool, Australia, which is no doubt a prudent step in a weak international margin scenario.

As we are not expecting any near-term price deterioration and oil-directed drilling is gaining momentum, we foresee signs of improvement in the long-term outlook of companies in the oilfield services sector, especially for leaders such as Baker Hughes.

 
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