Baker Hughes Outperforms in 2Q

Baker Hughes Inc. ( BHI - Analyst Report ) reported second quarter 2012 earnings of $1.00 a share, which surpassed the Zacks Consusus Estimate and year-ago earnings of 77 cents and 93 cents, respectively.

Revenue increased more than 12% year over year to $5,326 million in the quarter from $4,741 million in the second quarter of 2011. The top line also exceeded the Zacks Consensus Estimate of $5,267 million.

During the reported quarter, the company experienced growth in earnings in spite of tough market conditions in North America. The improved activity in onshore U.S. as well as initiatives undertaken to develop the Pressure Pumping business helped the company to offset the impact of seasonal slowdown in Canada, the increased costs of certain raw materials and a weak Pressure Pumping market. Internationally, the company experienced solid top-line growth due to robust performance primarily in Europe and the Middle East.

Segmental Highlights

Of Baker Hughes’ total quarterly revenue, North America, Europe/Africa/Russia/Caspian, Middle East/Asia-Pacific and Latin America accounted for 50%, 17%, 15% and 11%, respectively. The remainder was generated by the Industrial Services segment.

A strong improvement in before-tax profit was noticed in Europe/Africa/Russia/Caspian, which recorded a profit before-tax margin of 17% versus 5% in the year-ago quarter. Pre-tax margin in North America came in at 13%, compared with 18% in the year-earlier quarter.

Latin America recorded profit before-tax margin of 13% (flat with the year-ago quarter) while it was 11% in Middle East/Asia-Pacific (down from 12% in the second quarter 2011). The Industrial Services segment’s margin was 14% compared to the prior-year figure of 15%.

Liquidity

At the end of the second quarter, Baker Hughes had $792 million in cash and cash equivalents, while long-term debt was $3,841 million, representing a debt-to-capitalization ratio of 18.6%. Net cash flow provided by the operating activities as of June 30, 2012 was $124 million compared to $397 million in the prior-year quarter. The company’s capital expenditures were $771 million.

Our Take

Houston, Texas-based Baker Hughes, the world's third-largest oilfield services provider, after Schlumberger Ltd. ( SLB - Analyst Report ) and Halliburton Co. ( HAL - Analyst Report ) is favorably positioned with significant improvements in activity levels in both North America and the international regions. The company’s strong portfolio of products and services will help it generate better-than-average results in the domestic market and enable it to further penetrate in the international markets. In this respect, the Europe/Africa/Russia Caspian segment posted outstanding results, contributed by the robust performance across Europe. The company drilled two longest, extended reach wells in the remote Yamal Peninsula above the Arctic Circle extending below the Kara Sea.

During the reported quarter, Baker Hughes’ was awarded a drilling contract for turn-key delivery of more than 75 wells in the Shaybah field by Saudi Aramco. This is likely to augment earnings in the coming quarters.

The company expects its worldwide demand to improve further, particularly in China, India, and other developing nations of Asia and the Middle East that will in turn boost its international spending. Activity is also expected to climb in the balance of 2012 led by the steady improvement in Latin America, Middle East and the deepwater markets and will consequently support pricing improvements. Baker Hughes remains committed to enhance its international operations.

However, Baker Hughes, pointed out that pricing pressures, supply chain and raw material constraints, as well as implementation issues will likely weigh on its pressure pumping business in North America through the second half of this year.

Baker Hughes holds a Zacks #3 Rank, which is equivalent to a Neutral rating for a period of one to three months. We maintain a long-term Underperform recommendation on the stock.