SLB Schlumberger Ltd

Oilfield service provider, Baker Hughes Inc. (BHI) has cut its outlook for the first quarter of 2012 with energy producers shifting their focus from natural gas to crude drilling. This is Baker Hughes’ second straight reduction in the North American profit percentage.

The company expects the operating profit before tax margin for its North America division to be in the range of 13.2% and 14.2% for the first quarter of 2012 compared with 18.7% in the preceding quarter. For the international segment, Baker anticipates its profit before tax between 12.2% and 13.2% versus 15.6% in the fourth quarter of 2011.

The tempered outlook for North America mainly reflects lower natural gas directed pressure pumping activity, along with an early spring break-up even though Canada experienced improved rig count levels sequentially. However, the outlook for its international business is reflective of seasonality of product sales, weather, geographic mix, and project delays in Latin America.

Major energy companies are shifting its drilling operations away from natural gas amidst a bleak natural gas price environment. As such, drilling service providers, like Baker, are facing weak fleet utilization, tempered pricing as well as escalating personnel and logistics costs in its pressure pumping product line, which is used for hydraulic fracturing to tap shale fields for natural gas exploration. The business is also experiencing shortage of important raw materials like gel.

The world’s third-largest oilfield services provider, 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. In view of the present market scenario, the company will also review its financial plans for the year and expects to amend 2012 capital expenditures for the pressure pumping product line.

In response to the present low gas price environment, we believe it’s a wait-and-watch situation for the other major oilfield service providers like Halliburton Co. (HAL) and Schlumberger Ltd. (SLB).

Being one of the largest oilfield service companies, we believe Baker Hughes will eventually capitalize on the favorable trends associated with increased oil drilling activities following high commodity prices as well as the development of several new oil shale plays.

We maintain our long-term Neutral recommendation for Baker, which holds a Zacks #3 Rank (short-term Hold rating).

 
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