Among all the oil services companies, it's the hardest to determine whether Baker Hughes, a GE Company (NYSE:BKR) had a good quarter or not. While the company did produce a net income gain for the first time since the merger between Baker Hughes and General Electric's oil and gas division, there were still a couple of business segments that put up lackluster results. What makes it challenging to read into these results is that it's hard to say if this is a temporary thing or a cause for concern.
Let's take a look at BHGE's most recent results to see why it is so hard to take the pulse of the oil services company and what investors can make of this earnings report.
By the numbers
|Metric||Q3 2018||Q2 2018||Q3 2017|
|Revenue||$5.66 billion||$5.56 billion||$5.3 billion|
|Operating income||$282 million||$78 million||($193 million)|
|Free cash flow||$146 million||($22 million)||($405 million)|
So here's the good news, revenue was up slightly compared to this time last year and the company improved margins enough to turn a profit and generate free cash flow in the quarter. Much of that success came from the company's oil-field services division, which does things like drilling, pressure pumping, and well completions. Also, BHGE's bottom line benefited from fewer one-time charges and expenses related to the integration and restructuring.
The parts of BHGE's business that are harder to get a handle on are its oil-field equipment and turbomachinery and process solutions (TPS) business. Both of these segments manufacture and sell big-ticket items like blowout preventers, subsea control valves, and the equipment for liquefaction and regasification of liquefied natural gas (LNG).
In the most recent quarter, the company reported that oil-field equipment margins were slightly better from a modest uptick in revenue, but new orders in the quarter were down 47% sequentially and reported a book-to-bill ratio of only 0.87. In TPS, new orders were up, but revenue and operating earnings were down slightly year over year.
The trouble is that since both divisions involve large-item purchases, results for these segments tend to be lumpy and can vary wildly from quarter to quarter. It may not be a big deal that this quarter's results were lackluster, but it's worth watching these segments for improvement.
What management had to say
On the company's conference call, CEO Lorenzo Simonelli gave an encouraging outlook for the business that should help boost revenue, especially for its oil services business.
We are encouraged by the improved outlook on the macro environment. Overall, the North American market continues to be resilient. Drilling related activity remains stable, which bodes well for our portfolio. We see softness in frac related completions activity as the North American pressure pumping market weakens into the fourth quarter. Outside of our minority investment in BJ Services, we are not materially impacted by the current challenges in the North American pressure pumping market. The international markets are improving and we expect them to remain strong in 2019, as customers increase spending and activity levels.
It was interesting to note the BHGE doesn't have a large presence in pressure pumping because it is the part of the U.S. shale industry suffering the most these days. Both Halliburton and Schlumberger noted a significant decline in pressure pumping services in their respective earnings reports this past quarter.
Simonelli also highlighted a large uptick liquefied natural gas [LNG] projects. This is critical to the company's TPS segment.
Given the strong global demand growth and current landed Asian spot prices over $10/mBtu, we are seeing more confidence from our customers to move ahead with their [LNG] projects.
Earlier this month, we saw the first major final investment decision since 2015 with LNG Canada sanctioning two trains totaling 14 million tons per annum. As we have previously stated, we believe this is just the start of a new significant build cycle for which our portfolio is well positioned.
You can read a full transcript of BHGE's conference call here.
Hard to tell
It's encouraging to see integration and restructuring costs come down to a point that BHGE is now turning a profit. Also, management's comments on the conference call were very optimistic about the growth in the industry and its unique position as a provider of services and equipment in every facet of the oil and gas value chain.
The concern, though, is that this business model has never been done before and not yet proven. Also, it's hard to tell if these less-than-stellar results from oil-field equipment and TPS are just part of a lumpy business or cause for concern. For the time being, it's probably best to sit on the sidelines to see this company can truly deliver on this business model.