If you've looked at Baker Hughes' (NYSE: BHI ) recent results, you may be convinced that the company is struggling somewhat. But while its quarterly results were hardly the stuff of things to write home about, you'd be wise to expect a strengthening in the second half of 2013.
True, Baker's quarter wasn't close to being as solid as that posted by Schlumberger (NYSE: SLB ) , which also reported last Friday, in its case a $0.05 beat vis-a-vis analysts' expectations. Nor did it match Halliburton (NYSE: HAL ) , which followed up today by also topping the consensus, albeit by only a penny. The three companies, along with Weatherford, typically are lumped together as a foursome of large, diversified providers of oil-field products and services.
How'd the company do?
For the quarter, Baker Hughes' net income was $240 million, or $0.54 per share, down from $260 million, or $0.60 per share, for the second quarter of 2012. If you back out one-time items, however, the company's per-share number comes to $0.61, a miss from the consensus expectation of $0.65. Revenue rose 3% to $5.49 billion.
North and South America were the keys to the company's lower than expected results. Our continent was affected by, among other things, unusually strong seasonal weakness in Canada, which led to a 70% drop in the rig count. While overall pre-tax margins slid to 9%, from 13% a year ago, the margin attributable to North America was 8%, compared with 14% year on year. It's worth noting, however, that, in the Gulf of Mexico, increased activity helped propel the company to strong sequential hikes in revenues and profits.
A newly hot Latin American country
Internationally, revenues of $2.5 billion were 7% above the year-ago second quarter. The delta would have been higher, but for lower revenue in Brazil, where the company is now working under a new drilling contract at lower prices. In Mexico, weak interest in bidding on acreage in the Chicontepec Basin in the country's north has resulted in a virtual shutdown of the play, an event that negatively affected Baker Hughes.
Nevertheless, all was not lost in Latin America. Baker Hughes has received a major contract to provide services for unconventional development in Argentina, which has suddenly become active, largely on the basis of the Vaca Muerta shale, which is thought by some to contain the world's second- or third-largest volume of shale reserves. Chevron (NYSE: CVX ) , for example, has committed to spend $1.24 billion in the play through the end of 2014 in a pilot development program.
Slowing the decline
And there are other bright spots at the company. As CEO Martin Craighead noted on the company's post-release call, Baker Hughes continues to develop new production technologies. The focus has been on three areas: increasing well complexity, improving drilling efficiency, and improving ultimate recovery.
In the third area, in order to cope with the sharp decline rates that are the norm for unconventional shale wells, the company has developed a successfully tested a FleX pump series. The electric submersible pump can operate at low flow rates, down to 50 barrels per day. The pump has been field-tested in the Eagle Ford, the Bakken, and the Permian and Central basins.
In those key U.S. plays, it has demonstrated production increases of up to 35%. On those bases, it appears likely to expand Baker Hughes' electrical submersible pump market by more than $1 billion.
But that's not all. Baker last year became the first company to introduce hydraulic fracturing pumps capable of operating on diesel and natural gas. Since that time, as has Schlumberger, it's progressed to the development of bi-fuel powered fracking pumps.
Given Baker Hughes' less than scintillating earnings report, I'd hardly recommend proverbially backing up the truck to acquire the company's shares. Nevertheless, I wouldn't argue with the notion that we're dealing with a stronger company than its June 2013 performance would indicate. On that basis, I'd keep close tabs on its Western Hemisphere improvements and its new additions to the all-important technology arena.
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