SLB Schlumberger Ltd

Baker Hughes Inc. (BHI) reported fourth quarter 2012 adjusted earnings from continuing operations of 62 cents a share, which beat the Zacks Consensus Estimate by a penny on strong international results. However, the quarterly figure fell 48.3% from the year-ago adjusted profit level of $1.20 a share.

The year over year underperformance stemmed mainly from unfavorable pricing conditions in the North American Pressure Pumping business. Moreover, weak activity in several important markets of Baker Hughes resulted in an unfavorable mix.

Total revenue of $5,221 million in the quarter declined almost 2% from the year-ago level of $5,295 million. However, the top line surpassed the Zacks Consensus Estimate of $5,193 million.

Full-year 2012 adjusted earnings from continuing operations came in at $3.00 a share, missing our expectation of $3.20 by 6.3% and the year-ago earnings of $4.14 by 27.5%.

Total revenue of $20,929 million in 2012 increased 7.7% year over year but was below the Zacks Consensus Estimate of $21,036 million.

Fourth Quarter Segmental Highlights

Of Baker Hughes' total quarterly revenue, North America, Europe/Africa/Russia/Caspian, Middle East/Asia-Pacific and Latin America accounted for 49%, 18%, 17% and 12%, respectively. The remainder was generated by the Industrial Services segment.

An improvement in before-tax profit was noticed in Europe/Africa/Russia/Caspian, which recorded a profit before-tax margin of 18% versus 11% in the year-ago quarter, and in Industrial Services segment with 11% margin (versus 3% in the year-ago quarter). All other segments registered lackluster pre-tax margins, with North America coming in at 9% (compared with 15% in the year-earlier quarter) and Latin America at 1% (versus 3%). Pre-tax margins at Middle East/Asia-Pacific segment came in at 9% (at par with the year-earlier quarter).  

Liquidity

At the end of the fourth quarter, Baker Hughes had $1,015.0 million in cash and cash equivalents, while long-term debt was $3,837.0 million, representing a debt-to-capitalization ratio of 18.2%. The company's capital expenditures were $714.0 million in the quarter.

Our Take

Baker Hughes, the world's third-largest oilfield services provider following Schlumberger Ltd. (SLB) and Halliburton Co. (HAL), holds a Zacks Rank #5 (Strong Sell).

Although Baker Hughes reregistered impressive international growth and has strong positions in various offshore markets worldwide, its earnings dropped on an annualized basis during Oct–Dec 2012.

The company’s significant improvement in its Integrated Operations business in the Middle East and the Gulf of Mexico performance (which generated 30% growth in 2012) remain overshadowed by the ongoing pricing pressures, supply chain and raw material constraints as well as implementation issues on its pressure pumping business in North America. Its margins were hit particularly by a fall in the North American pressure pumping business.

Given these headwinds, we expect the shares of Baker Hughes to be under pressure in the near future. However, one oilfield service company, which is expected to perform well in the coming one to three months, is Hornbeck Offshore Services, Inc (HOS). It carries a Zacks Rank #2 (Buy).
 

 
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