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Should Baker Hughes Run Away From Home?

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It wasn't a pretty quarter for oil-field services company Baker Hughes (NYSE: BHI  ) . That the Houston-based corporation fell well short of its year-ago results was hardly a surprise. But that it failed to even approach the consensus per-share expectation among its cadre of analysts, obviously, was less than inspiring.

For the quarter, the company recorded earnings from continuing operations of $211 million, or $0.48 per share, versus $331 million, or $0.76 per share, for the final quarter of 2011. The oil-field services analysts who monitor the company had arrived at a mean expectation of $0.61 per share, fully 21% above the company's actual results. Revenues for the quarter came in at $5.22 billion, compared with an anticipated $5.20.

Lest you assume, however, that the quarter will consist of a bevy of substandard results for the oilfield services contingent, look back at the performance of the sector's kingpin, Schlumberger (NYSE: SLB  ) . After items, the larger company managed to beat its per-share earnings of a year ago, the analysts' expectation for the December quarter, and its revenues for the fourth quarter of 2011.

The difference-maker
The key contrast between the two companies' quarters related primarily to Baker Hughes' higher dependence on North American operations. As company CEO Martin Craighead said: "Our fourth-quarter results reflect the challenges faced by the industry as North American activity declined sharply toward the end of the year, and we continue to deal with unfavorable pricing conditions in the pressure pumping market. As a result, we experienced a decline in North America revenues and margins this quarter."

While fully 49% of Baker Hughes' revenues were tied to the ponderous North American market during the quarter -- down from more than 53% in the year-earlier period -- less than a third of Schlumberger's top line was attributable to North America in 2012. And as the former company's revenues on the continent were sliding by about 1.4% year over year, its pre-tax profit margin from North American operations tumbled by fully 40% to 9% of the revenues generated there.

Speed bumps at home
Baker Hughes' declining results on its home continent were attributable to a combination of pressure on pressure pumping operations -- no pun intended -- along with a drop in the U.S. rig count, especially toward the end of the quarter, and the cessation of all Canadian drilling and completion operations by one of Baker's major customers during the quarter. Like Schlumberger, however, Baker Hughes benefited from improved activity levels in the Gulf of Mexico.

Internationally, the company's results were far stronger than those generated at home. In the Europe-Africa-Russia Caspian segment, revenues were up by 10% from those posted in the September quarter. In the Middle East, Asia-Pacific markets revenues rose by $38 million, although operating profits were about flat because of startup costs in Iraq and preparation for unconventional operations in Saudi Arabia. Obviously, both of those expenses bode well for future volumes in the area.

New international ventures
As I've noted to Fools previously, during the quarter Baker Hughes announced that it had reached an agreement to form a joint venture with Paris-based CGGVeritas (NYSE: CGG  ) . The combination will combine Baker Hughes' near-wellbore geomechanical and petrophysical properties with the French company's seismic data to improve customers' ability to conduct shale reservoir exploration.

Given the obvious importance of Baker Hughes' expanding operations outside North America, it's important to note that the company has been awarded a contract to provide integrated services in Brazil's deepwater Santos basin. In addition, it has inked new pacts for work in Indonesia and the Cooper basin of Australia. And in the South China Sea, a new direct award for multiple deepwater exploration wells will materially expand its operations in that emerging area.

A Foolish takeaway
Given the significant differences between the results reported thus far by Schlumberger and Baker Hughes -- and with Halliburton (NYSE: HAL  ) next in line -- a comparison among the three companies vis-a-vis some key metrics might prove enlightening to potential oil-field services investors.





Forward P/E (Times)




PEG Ratio




Operating Margin




Forward Annual Yield




Sources: Yahoo! Finance and TMF calculations.

The ordering of the above metrics leaves me with two salient conclusions: first, to the extent that Baker Hughes is able to continue to the reduction in the percentage of its revenues generated in North America, the company will become steadily more attractive to investors. In the meantime, it remains less compelling than either Schlumberger or Halliburton.

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