Baker Hughes Gets Scalded

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It seemed to be a classic overreaction: Baker Hughes (NYSE: BHI) was among the more negatively noticed stocks on Friday, following an announcement by management that the company will fall short of expectations when it discloses its quarterly results late next week. In the resulting drubbing, the company's shares dropped nearly 6% to $84.

According to management's prerelease, Baker Hughes will report earnings for the June-ending quarter in the range of $1.07 to $1.09 per share, compared with $1.17 per share in the previous quarter. That's about a dime short of expectations. The reason given for the decline was a "significant deterioration of activity and profitability" in Canada, particularly in the drilling and evaluation segment. The company further said that non-North American revenue and growth "was consistent with previously disclosed guidance."

So, Fools, let's look more closely at the situation with this large, Houston-based oilfield-services company. First, half of the quarter's earnings decline is attributable to the combination of a higher tax rate and increased repair and maintenance costs in its INTEQ division. And when I look at the Canadian rig count -- which is down by more than half from a year ago -- it seems clear to me that therein lurks the cause for the rest of the decline.

Further, we're in the midst of a substantial shift in the businesses of Baker Hughes and other major service companies such as Halliburton (NYSE: HAL) and Weatherford (NYSE: WFT) away from the West in favor of the more active Eastern Hemisphere. Earlier this year, that transformation led Halliburton's CEO David Lesar to move his own base of operations from Houston to Dubai. Industry leader Schlumberger (NYSE: SLB) already is less concentrated in North America than most of its peers and therefore likely will find its near-term future less wrenching.

For its part, Baker Hughes is a well-structured company with a solid management team and an important role in the vital energy services industry. It's played a meaningful part in a host of oilfield technological innovations, including the development of now-pervasive horizontal drilling. It's also a company that I don't believe deserved the pasting it received Friday. For these reasons, I'd conclude that it should be accorded careful attention by Fools with an appetite for sound energy investments.

For related Foolishness:

• Baker Hughes Bounces Back
• The Most Global of Businesses
• Schlumberger Picks Up Speed

Fool contributor David Lee Smith owns shares in Baker Hughes and Halliburton, but not in the other companies mentioned. He welcomes your questions and comments. The Motley Fool does have a disclosure policy.