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Make Hay With Baker Hughes' Global Push

By David Smith - Apr 22, 2013 at 4:59PM

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Differences may exist regarding the North American market, but Baker Hughes is flexing its muscles globally.

Last week, in looking ahead to Baker Hughes' (BHI) Friday release of its first-quarter 2013 results, I offered the opinion: "A perspective on a possible strengthening in the North American market will obviously be a subject of real importance for Baker's management to address during the company's conference call. "

Sure enough, during the call with analysts and investors, CEO Martin Craighead began with: "First, North America took a step in the right direction, with growth in both revenue and margins. The results were driven by strong activity in Canada, along with improved utilization in our pressure pumping business."

Another angle
Without taking hindsight issue with that statement, I'm forced to compare it to the assessment of the same subject on the same day by Schlumberger's (SLB 2.95%) CEO Paal Kibsgaard, who observed during his company's call that "... the main concern in North America land remains the pricing, where the downwards trend in drilling, wireline, and coiled tubing seen in the fourth quarter continued in Q1. In addition, we also saw further downward pricing pressure on a number of hydraulic fracturing bids during the quarter, adding further uncertainty to the North America land market outlook." 

Let's hope, for the sake of both Baker Hughes and the rest of the oil-field services industry, that Craighead's assessment ultimately prevails. The current quarter and perhaps the third quarter of 2013 will go a long way toward clarifying the oil and gas picture on our continent.

In the meantime, it's worth noting that essentially half of Baker's revenues were generated in North America in the first quarter. The continents' top-line number, $2.60 billion, was down 9% from the $2.86 billion in the comparable quarter a year ago. The company's North America pre-tax operating margin also slid to 9%, from 14%.

The total take
In total, Baker Hughes' adjusted income for the quarter, absent a $23 million ($0.05 per diluted share) loss for an adjustment relating to a devaluation of Venezuela's currency, was $0.65 per share, compared with $0.86 for a year earlier. However, the analysts who follow the company had arrived at a consensus expectation of $0.62 per share. So the company can be credited with a solid beat. 

Looking ahead, Craighead expects the short-term trend in North America to be mixed, with U.S. onshore rig activity expanding and Canada's dropping by about 70%, as the annual spring break-up prevails. Looking out farther, he expects that "... anticipated U.S. onshore rig count growth, further utilization increases in our U.S. pressure pumping product line, improved Canadian activity and the shift of Gulf of Mexico activity from exploration to development are all expected to improve revenues and margins."

An international push
The international picture is also robust, with anticipated rig utilization growth of about 7% nearly across the board. The Middle East and Asia Pacific segment will likely benefit from a buildup of the company's work in Iraq and a further movement toward the maturation of Saudi Arabia's nascent unconventional drilling program.

Similarly, the segment comprised of Europe, Africa, and the Russia-Caspian regions should benefit from growth in Baker's presence in both the North Sea and Russia. Conversely, South America will be hindered by "new customer delays" in Mexico, along with what Craighead somewhat ominously refers to as "our transition to lower levels of activity in Brazil."

Despite Craighead's relative ebullience regarding North America, it nevertheless appears that the sizzle at Baker Hughes lies in the international markets. As I noted last week, the company has teamed up with CGGVeritaz (NYSE: CGG) to add substantial seismic capabilities to its global repertoire. Further, it's working with Norway's Statoil (EQNR 0.06%) on new projects in the North Sea, the Norwegian Sea, and the Barents Sea. It's also been contracted by Chevron (CVX 3.74%) for work on the giant Gorgon project in Australia, and its gearing up with Russia's Lukoil and Statoil on the West Qurna-2 oil fields in Iraq.

The Foolish bottom line
All this was obviously key to a comment from my former analyst colleague Kurt Hallead of RBC Capital Markets to Craighead during the question and answer period following management's remarks: "I'd have to say the tone of your commentary as it relates to the international market in general (is) the most positive that I've heard from any service company ... since the 2007, 2008 time frame." 

Clearly Kurt is onto something. Given that obviously international surge, if Craighead's comments on North America turn out to be somewhat less than overdone, Baker Hughes merits the careful attention of energy-investing Fools.

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