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We have upgraded our recommendation on Texas-based Baker Hughes Inc. (BHI - Analyst Report) to Neutral from Underperform. Baker Hughes is the world's third-largest oilfield services provider - after Schlumberger Ltd. (SLB - Analyst Report) and Halliburton Co. (HAL - Analyst Report).

A series of contract wins and integrated drilling services has placed the company well in the emerging markets of Gulf of Mexico (GoM) and North Sea. The company is also gaining traction in the Middle East and unconventional markets in Saudi Arabia. The company’s effort to reform its pressure pumping business in the US, along with expectations of improved international margins will likely boost its revenues going forward.

Among the diversified oilfield service players, Baker Hughes is well positioned with an expectation of significant improvement in activity levels in both North America and international regions. We believe that Baker Hughes will benefit from two positive aspects that should boost the global oil service business. The first is a structural shift in North America, mainly benefiting from the integration of BJ Services business, and the other is an international turnaround.

Both oil and natural gas-directed drilling increased from the tough levels witnessed in mid 2009 with majority of the recent drilling being oil-directed. The increase in oil drilling was supported by high commodity prices and the development of several new oil shale plays. Incremental gas drilling was driven by higher activity in the gas shale plays. Being one of the largest oilfield service companies, Baker Hughes is capitalizing on these favorable trends.

However, Baker Hughes’ third-quarter 2012 results suffered from the discrepancies in the North American Pressure Pumping business.  Further, the company pointed out that pricing, supply chain and raw material constraints, as well as implementation issues will likely weigh on the pressure pumping business in North America through the second half of 2012. Besides, weak activity in several important markets for Baker Hughes resulted in an unfavorable mix in the third quarter. Internationally, the company’s significant markets, like Brazil, Colombia, and Norway, registered a 17% decrease in the rig count collectively.

In view of the above factors, we believe the stock will move in line with the broader market indices.

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