On Friday, Schlumberger (NYSE: SLB ) , the largest of the oil-field services companies led off earnings season for its sector. Its results were comfortably above expectations on the top line, and eked out a beat at the per-share earnings level. On Wednesday, Baker Hughes (NYSE: BHI ) will be next in line to tell us about its quarter, although there appears to be less room for optimism than was the case with the larger company.
Specifically, while Schlumberger's per-share line bore a number that was essentially in line the company's metric for the same quarter a year ago, the consensus among analysts who follow Baker Hughes is for a per-share figure of about $0.61, precisely half of the number chalked up in the fourth quarter of 2011. Revenues are pegged to materialize at about $5.20 billion, a slide from last year's $5.39 billion.
A multi-quarter trend
It isn't as if the likely earnings slide represents and aberration. Sequentially, the fourth quarter will be compared to the generation of $0.73 in per share for adjusted earnings for the third quarter of 2012, and to $1.00 per diluted share for the second quarter of the year. Clearly, that can be called a trend.
Not that the continuance in decreases will come out of the blue. Indeed, in mid-December, Baker Hughes' management stated that "North American revenues and profit margins are expected to be lower than previous expectations, due to weaker than anticipated onshore activity and further price erosion within pressure pumping operations." As a result, the company said, the pre-tax margin for North American operations would likely fall within an 8.5% and 9.5% range, compared with 11.7% for the third quarter.
And if you think that the North American malaise might be compensated for by robust activity overseas, Baker Hughes management likely would suggest that you think again. As was noted in the same December earnings outlook: "International operations are being adversely affected by several factors, including weaker than anticipated rig count activity in Brazil and Columbia, activity delays in the North Sea, and continued operational delays in Iraq." As such, while international margins are unlikely to dip to the extent of their North American brethren, they're unlikely to meaningfully top those of the prior quarter.
But investing represents an exercise in looking ahead, rather than peering into one's rearview mirror. Consequently, one of the key areas of interest for the company will be news of any significant contracts that have been garnered during the quarter. For instance, in the third quarter, Baker Hughes announced the receipt of a $500 million, two-year contract to provide integrated drilling services for Statoil (NYSE: STO ) , offshore Norway. The disclosure of additional awards of this type would likely assuage the negative implications of the steady downward slide in the company's earnings.
Plummeting rig demand
Similarly, an indication that figurative brakes may be on the verge of being applied to the plummeting of the U.S. rig count would be a positive. As recently as Friday, however, the company, which has long been the world's rig count statistician, announced that the number of units working in its home country had declined to the lowest level in 22 months. With crude supplies at unexpectedly high levels and drilling efficiency rising steadily, the call for additional rigs has fallen steadily. Somewhat simplistically, our country has morphed from a 30-year phenomenon of rising crude demand and falling supply to one of falling demand an heightened supply.
It's not that Baker Hughes has been simply wringing its hands amid these difficult conditions. For instance, during the quarter, the company announced an agreement with Paris-based CGGVeritas (NYSE: CGG ) to form a venture that will be charged with improving shale reservoir exploration. By combining the benefits of Baker Hughes' near-wellbore geomechanical and petrophysical properties with seismic data from CGGVeritas, operators will be better able to optimize well placement and completion design more efficiently and earlier in the well construction process.
Further, Baker Hughes has converted a fleet of its Rhino hydraulic fracturing units to bifuel pumps. Using a mixture of natural gas and diesel, the pumps now will require 65% less diesel, with no loss of hydraulic horsepower.
The Foolish bottom line
From a quantitative perspective, it's worth noting that Baker Hughes sports a forward P/E ratio of 14.10 times, an operating margin of 12.05%, and a forward annual dividend yield of 1.40%. By comparison, Halliburton (NYSE: HAL ) , the second-largest member of the services set, carries a 12.82 times forward P/E, an operating margin of 17.36%, and a forward annual dividend yield of 1.00%. Schlumberger, the King Kong of oil-field services, has a forward P/E of 12.94 times, an operating margin of 18.18%, and a forward annual dividend yield of 1.40%.
Is it any wonder, then, that 88% of the analysts following Schlumberger rate the company at least a buy, versus 70% for Halliburton, and 32% for Baker Hughes? From my perspective I find these variances thoroughly defensible.
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