SLB Schlumberger Ltd

Baker Hughes Inc. (BHI) delivered impressive fourth quarter 2011 results, recording a year-over-year jump in per share profit on strong domestic operations. The company’s earnings of $1.22 a share showed a vast improvement from 77 cents earned a year ago. However, the quarterly results were below the Zacks Consensus Estimate of $1.33.

 

In 2011, Baker Hughes reported earnings of $4.20 per share compared to $2.06 per share in 2010. But the earnings were below the Zacks Consensus Estimate of $4.31 per share.

 

Revenue shot up 22% year over year to $5,387 million in the quarter from $4,423 million. The top line also exceeded the Zacks Consensus Estimate of $5,462 million.

 

For 2011, revenue stood at $19,831 million versus $14,414 million in 2010. However, total revenue for the year missed the Zacks Consensus Estimate of $19,898 million.

 

During the reported quarter, the company experienced strong demand in North America as the business fundamentals remained robust owing to activity growth in the unconventional basins. Excluding Pressure Pumping, all other groups - Drilling, Evaluation, Completion and Production showed steady improvements. Internationally, the company experienced solid top-line growth, margin also was strong at 16% due to robust performance across all regions.

 

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%, 14% and 11%, respectively. The remainder was generated by the Industrial and Others segment.

 

A strong improvement in before-tax profit was noticed in Europe/Africa/Russia/Caspian during the quarter. Pre-tax margin in North America came in at 15%, compared with 22% in the year-earlier quarter.

 

Latin America recorded profit before-tax margin of 4% as against 9% in the year-ago quarter, while it was 9% in Middle East/Asia-Pacific (down from 10% in the fourth quarter 2010) and 11% (versus 8%) in Europe/Africa/Russia/Caspian. The Industrial Services and Other segment’s margin declined to a negative 7% from the prior-year figure of positive 10%.

 

Liquidity

 

At the end of the fourth quarter, Baker Hughes had $1,050 million in cash and cash equivalents, while long-term debt was $3,845 million, representing a debt-to-capitalization ratio of 19.4%. The company’s capital expenditures were $810 million during the reported quarter.

 

Outlook

 

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 in the international markets. The company also has a competitive set of technologies, which allows it to pursue deepwater activity in the GoM.

 

The company expects its worldwide demand to improve further, particularly in China, India, and other developing nations of Asia and the Middle East, which will in turn boost its international spending. Activity is also expected to climb in 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 enhancing its international.

 

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 a headwind.

 

We maintain a long-term Neutral recommendation on the stock.  

 
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