Tough market lowers Baker Hughes 4Q earnings

Baker Hughes’ fourth-quarter earnings slumped in the face of onshore drilling declines in North America and delays in international operations.

Fourth quarter net income fell to $214 million or 49 cents per share, from $314 million, or 72 cents per share, for the same time last year, the Houston-based oil field services company said today. Fourth quarter revenue also declined two percent to $5.22 billion, from $5.3 billion the same time last year.

The returns were slightly better than Wall Street analysts had predicted, driven by a strong performance in operations in Russia, Europe and Africa.

“We believe Baker Hughes’ 4Q12 earnings release has modestly positive implications for the stock as the company reported a decent quarter that topped lowered expectations and indicated significant capital discipline in 2013,” wrote Barclays analyst James West in a research note.

Unexpectedly high supplies of oil in the US and more efficient drilling techniques have hurt services companies like Baker Hughes, as lower natural gas prices have slowed demand for their services. Baker Hughes reported $2.5 billion in revenue in the fourth quarter for North America, down from $2.8 billion the same last year, reflecting this slowdown.

Competition has become fierce for pressure pumping services, further thinning profit margins for the oilfield service companies – a trend that Baker Hughes officials say may continue into 2013.

“For pressure pumping, the question is whether pricing continues to decline and outpaces our cost savings,” said Peter Ragauss, chief financial officer for Baker Hughes, at the earnings call. “Pricing has been eating up those savings in recent quarters – that is the big volatility.”

Baker Hughes’ 2012 revenue grew eight percent to $20.93 billion from $19.43 billion in 2011, but these lower prices undercut profits. The company earned $1.31 billion, or $2.97 per share, for the full year, compared with $1.74 billion, or $3.97 per share, in the prior year.

Ragauss estimated that drilling rig efficient improvements and growing competition has led to roughly excess 300 rigs in North America, with 25 percent excess capacity in pressure pumping.

As prices have dropped, Baker Hughes has slashed its planned investment in domestic drilling, decreasing it capital spending budget by 30 percent for 2013.

“I would imagine that North America represented more than 50 percent of their spending budget going to 2012,” said Bill Herbert, an analyst with Simmons and Co. “It is 35 percent in 2013. The returns are not there right now, so they are committing capital elsewhere.”

While Baker Hughes has a smaller share of its business overseas than its competitor, Schlumberger, healthy international revenues still lessened the drag on revenue from the North America downturn, with Europe, Africa and Russia all showing growth in both fourth quarter revenue. The company generated fourth-quarter revenue of $950 million, and profits of $173 million, over the same time last year, $910 million and $149 million, respectively.

Baker Hughes lost a key contract with Brazilian-owned Petrobras, which is expected to result in stagnant returns for Latin America in 2013, despite growth in Mexico and Columbia.