SLB Schlumberger Ltd

Baker Hughes Inc. (BHI) impressed with its third quarter 2011 results, recording a year-over-year jump in per share profit on strong domestic operations. The company’s earnings of $1.18 a share showed a dramatic improvement from 59 cents earned a year ago. However, the quarterly results were below the Zacks Consensus Estimate of $1.21.

Revenue shot up 27% to $5,178 million in the quarter from the year-earlier level of $4,078 million. The top line also exceeded the Zacks Consensus Estimate of $5,150 million.

During the reported quarter, the company experienced a strong demand in Canada and solid growth across U.S. Land. The Gulf of Mexico (GoM) improved marginally during the quarter as the pace of permitting saw a modest improvement. Internationally, although the company experienced a solid top-line growth, its margins plunged approximately 125 basis points due to changes in the geographic and product mix.

Segmental Highlights

Of Baker Hughes’ total quarterly revenue, North America, Europe/Africa/Russia/Caspian, Middle East/Asia-Pacific and Latin America accounted for 52%, 16%, 14% and 11%, respectively. The remainder was generated by the Industrial and Others segment.

A strong improvement in before-tax profit was noticed in North America and Latin America during the quarter. Pre-tax margin in North America came in at 22%, compared with 17% in the year-earlier quarter.

Latin America recorded profit before-tax margin of 13% as against 2% in the year-ago quarter, while it was 12% for Middle East/Asia-Pacific (up from 6% in the third quarter 2010) and 12% (versus 6%) for Europe/Africa/Russia/Caspian. The Industrial Services and Other segment’s margin declined to 8% from the prior-year figure of 13%.

Liquidity

At the end of the third quarter, Baker Hughes had $803 million in cash and cash equivalents, while long-term debt was $3,846 million, representing a debt-to-capitalization ratio of 19.6%. The company’s capital expenditures were $628 million during the reported quarter.

Outlook

We believe that Houston, Texas-based Baker Hughes, the world's third-largest oilfield services provider, 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 international markets. The company also has a competitive set of technologies, which allows it to continue deepwater activity in the GoM.

The company expects its worldwide demand to show an improvement, particularly in China, India, developing Asia and the Middle East, which will in turn boost its international spending. Activity is also expected to climb for the balance of the year and into 2012 led by the steady improvement in Brazil and the Middle East and will consequently support pricing improvements. Baker Hughes remains committed in enhancing its international margins and expects to deliver 15% international margins in the fourth quarter.

However, we remain cautious about the tardy deepwater drilling in the U.S. Gulf region. While deepwater activities have increased, the pace of permits being issued has slowed significantly. Competition from the heavyweight Schlumberger Ltd. (SLB) also remains in place.

We maintain a long-term Neutral rating on the stock.  Baker Hughes currently retains a Zacks #3 Rank (short-term Hold rating).

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