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Baker Hughes Inc. (BHI - Analyst Report) reported third quarter 2012 adjusted earnings of 73 cents a share, which came in below the Zacks Consensus Estimate and year-ago earnings of 84 cents and $1.18, respectively.

The underperformance mainly stemmed from the discrepancies in the North American Pressure Pumping business.  Besides, weak activity in several important markets for Baker Hughes resulted in an unfavorable mix.

However, revenue increased more than 3% year over year to $5,228.0 million in the quarter from $5,064.0 million in the third quarter of 2011. The top line failed to meet the Zacks Consensus Estimate of $5,427.0 million.

During the reported quarter, the company experienced growth in revenue in spite of tough market conditions in North America. The seasonal slowdown in Canada and a weak Pressure Pumping market have impacted the company’s performance. Internationally, the company’s significant markets, like Brazil, Colombia, and Norway, registered a 17% decrease in rig count collectively.

Segmental Highlights

Of Baker Hughes' total quarterly revenue, North America, Europe/Africa/Russia/Caspian, Middle East/Asia-Pacific and Latin America accounted for 52%, 17%, 16% and 11%, respectively. The remainder was generated by the Industrial Services segment.

An improvement in before-tax profit was noticed in Europe/Africa/Russia/Caspian, which recorded a profit before-tax margin of 13% versus 12% in the year-ago quarter. All other segments registered lackluster pre-tax margins, with North America coming in at 12% (compared with 22% in the year-earlier quarter), Latin America at 9% (versus 12%), Middle East/Asia-Pacific at 10% (versus 11%) and Industrial Services segment's margin at 7% (versus 16%).

Liquidity

At the end of the third quarter, Baker Hughes had $1,007.0 million in cash and cash equivalents, while long-term debt was $3,839.0 million, representing a debt-to-capitalization ratio of 18.4%. The company's capital expenditures were $732.0 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 remains well positioned in growing as well as emerging markets of Gulf of Mexico (GoM) with a series of contracts, North Sea with its integrated drilling services, and the Middle East and emerging Saudi Arabian unconventional market.

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. Its margins were hit particularly by a fall in the North American pressure pumping business. Nonetheless, the company expects its international activity to rebound in the upcoming quarter.

Baker Hughes holds a Zacks #3 Rank, which is equivalent to a Neutral rating for a period of one to three months.

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