Baker Sees Lower N America Margin

Following in the footsteps of larger peers Schlumberger Limited (SLB - Analyst Report) and Halliburton Company (HAL - Analyst Report), the world's third-biggest oilfield services company Baker Hughes Inc. (BHI - Analyst Report) now sees lower margin for the fourth quarter on account of weak onshore drilling.

The company expects its North American revenue as well as profitability to be below expectation due to a slowdown in drilling activity in North America and lingering weakness in its pressure pumping business. Baker Hughes foresees North America operating profit before-tax margin of 8.5% to 9.5% in the to-be reported quarter, compared with 11% in the third quarter.

Moreover, the Houston-based company expects its overseas operations to be hurt by weak rig count in Brazil and Columbia, as well as delays in North Sea and Iraq operations. Baker Hughes still expects its international profitability before taxes to be in line with the third-quarter level at 12.0%. Rig count in international markets dropped 17% sequentially in the third quarter.

This news follows the largest oilfield services company, Schlumberger’s recent forecast of weak fourth quarter, which is likely to be hit by delays in international markets and a slow pace of drilling activity in North America. The second-largest member of the oilfield services contingent Halliburton is also experiencing slower activity level in North America.

Weak natural gas prices have affected the demand for gas-directed activity in North America. Hence, energy producers are now more interested in the oil-rich sand fields in Canada instead of gas prone areas in Appalachia.

Baker Hughes’ third quarter adjusted earnings fell short of the Zacks Consensus Estimate as well as the year-ago earnings by 13.1% and 38.1%, respectively. The underperformance mainly stemmed from the discrepancies in the North American Pressure Pumping business. Weak activity in several important markets for Baker Hughes also resulted in an unfavorable mix.

We remain skeptical about pricing, supply chain and raw material constraints, as well as implementation issues in its pressure pumping business in North America.

For the fourth quarter, the Zacks Consensus Estimate is 75 cents a share. With the year-ago profit level at $1.22 per share, the earnings will likely experience a 38.9% decrease for the fourth quarter. For 2012, the Zacks Consensus Estimate is $3.33, which represents a year-over-year decline of 20.7%. The company is scheduled to report its fourth quarter financial results on January 23, 2013.

Baker Hughes carries a Zacks #4 Rank (short-term Sell rating). Longer term, we maintain our Neutral recommendation on the company.