Baker Hughes Active in Australia - Analyst Blog

To cope with an increasing demand for its products, Baker Hughes Inc. (BHI) has opened a new facility in Welshpool, Australia. This is a 340,000 square feet facility, which includes offices, laboratories, training space, workshop facilities, a warehouse and storage as well as an equipment lay-down area.

The new facility will serve as the operations base for Australia and New Zealand and cater to three of the company's service lines such as pumping services, tubular services, and process and pipeline services.

Baker Hughes has been witnessing a strong growth in this region over the past few years. Accordingly, the company has quadrupled its workforce in the past three years. Importantly, earlier this year, Chevron (CVX) awarded Baker Hughes a contract to provide pipeline precommissioning services on the Gorgon Project off the Northwest Shelf of Australia. Work on this project has already started and is expected to be completed by the end of 2013.

While we believe that opening of such a facility will not have an immediate positive impact on the company's bottom line, it is no doubt a prudent step in a weak international margin scenario.

Baker Hughes' profit soared in the third quarter, primarily driven by the strength of the US Land market and seasonal recovery in Canada. However, it was partially tempered by weak international margins. On the call, management sounded ambitious about the company's initiatives to expand international margins and earmarked end 2011 as the turnaround point.   

Unless upstream spending begins to ramp up in international regions, it is difficult to pass a judgment on any specific geomarket. However, as management guided international margins of 15% by the end of 2011, it remains to be seen how the needle moves toward earnings and cash flow visibility. Until then, we prefer to stay on the sidelines and maintain our Neutral recommendation with a Zacks #3 Rank (Hold).

 
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