Baker Hughes' Profit Soars - Analyst Blog

Baker Hughes Inc. (BHI) reported a nearly three-fold jump in per share profit in its fourth quarter given the ongoing strength of customer spending in unconventional oil and gas plays and price realization.

The company's earnings came in at 77 cents per share, beating the Zacks Consensus Estimate of 65 cents and year-ago quarter's earnings of 27 cents. Excluding acquisition-related costs and an investment gain, earnings were 84 cents per share in the fourth quarter of 2010.

Revenue in the quarter shot up more than 82% to $4.42 billion from the year-earlier level of $2.43 billion. The quarter's revenue also exceeded the Zacks Consensus Estimate of $4.27 billion.

Notably, Baker Hughes'bigger rivals Schlumberger Ltd. (SLB) and Halliburton Co. (HAL) also posted better-than-expected quarterly results on the back of the all-important North American onshore activity.

Segmental Highlights

Of Baker Hughes' total quarterly revenue, North America, Europe/Africa/Russia/Caspian, Middle East/Asia-Pacific and Latin America accounted for 50%, 18%, 15% and 11%, respectively. The remaining was generated by the Industrial and Others segments.

A drastic improvement in before-tax operating profit was noticed in North America during the quarter. Profit before-tax margin in this region stood at 22%, compared with 9% in the year-earlier quarter. Further, Latin America, Europe/Africa/Russia/Caspian, Middle East/Asia-Pacific and Industrial Services and Other recorded profit before-tax margin of 9% (versus 3% in the year-ago quarter), 8% (versus 13%), 10% (flat year over year) and 10% (versus 13%), respectively. 

Liquidity

At the end of the quarter, Baker Hughes had $1.71 billion in cash and cash equivalents, while long-term debt stood at $3.89 billion, representing a debt-to-capitalization ratio of 21.4% (down from 21.8% at the end of third quarter). The company's capital expenditures were $486 million during the reported quarter.

Outlook

Given the continuous growth of unconventional gas and oil-directed drilling in the U.S., Baker Hughes foresees North America as the key potential area. We also believe the company is favorably positioned to benefit from the current trends in oilfield services, given improving operator spending and greater need for stimulation and completion of services in North America. The company also expects the ongoing economic recovery to result in higher oil demand and provide support to higher crude prices.

Following the suspension of the moratorium in the U.S. Gulf of Mexico (GoM), companies in the offshore oil industry are trying to enhance their deepwater assignments. Consequently, the fourth quarter also benefited from increased share of the incremental workover as well as from the completion activity. The company also has a very competitive set of technologies, which allows it to continue its activity in the deepwater GoM.

However, a delay in permit approval for deepwater and shelf drilling in the GoM continues to remain a concern. Baker Hughes does not expect significant price leverage in its international markets until late 2011.

Our Neutral recommendation for the stock remains unchanged at this stage and the company holds a Zacks #3 Rank (short-term Hold rating).

 
BAKER-HUGHES (BHI): Free Stock Analysis Report
 
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SCHLUMBERGER LT (SLB): Free Stock Analysis Report
 
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