GE merger on schedule

Baker Hughes (ticker: BHI) reported fourth quarter earnings on Thursday, showing a wider loss than expected.

Net loss was $417 million, or ($0.98) per common share, which includes charges related to asset impairments, restructuring charges, loss on sale of a majority interest in the North America onshore pressure pumping business, inventory write-offs, and costs associated with the merger.

These charges total $291 million, or $0.68 per share, giving an adjusted loss of $126 million, or $0.30 per share. This is a larger loss than the Zacks consensus of a loss $0.11 per share. The adjusted net loss for the year is $1.3 billion, or $2.96 per share. This loss was due to several factors, including reduced activity in the North Sea and postponed projects in the U.K.

Total quarterly revenue was $2.4 billion, down $1.0 billion from the fourth quarter of 2015. Total revenue for the year was $9.8 billion, which is $5.9 billion less than 2015 earnings of $15.7 billion.

North American revenue is expected to increase in the first half of 2017 as the shale producers continue to ramp up activity. International revenue, however, is expected to continue to decline as the price environment strongly affects the much more expensive offshore projects.

Much of Baker Hughes’s activity in the second half of 2016 was devoted to reducing operational costs and optimizing their capital structure. Annualized costs were reduced by almost $700 million, 40% beyond their initial goal, reported Chairman and CEO Martin Craighead, while $1 billion in debt was paid down and $750 million in shares were repurchased.

GE merger proceeding on schedule for mid-2017

Baker Hughes is expected to be acquired by GE this year, in a deal announced late October. Bloomberg analysts predict that this deal will pass antitrust regulatory scrutiny, unlike the planned but failed merger with Halliburton last year.

The resulting company will be the second largest oilfield services provider, behind Schlumberger, with higher sales than Halliburton. The transaction is scheduled to be completed in mid-2017.


Q&A from BHI Q4 conference call:

Q: Switching over to international, I guess your comments are a bit bearish here on the international outlook, where you’re talking about kind of declines in the first half. I was wondering if you could just kind of maybe help us understand a little bit what your customers are doing and what they’re saying these days. Seems like NOC spending should be fairly steady, but how about the IOCs? What are they looking for right now to start getting back to work? You mentioned deepwater doesn’t look very promising this year. So what do these IOCs need to see in order to start getting more aggressive and start spending more money in the market?

Martin S. Craighead: It’s a great question. And it’s a mix, right? You segmented it between NOCs and IOCs, but even in those two categories, certainly different temperaments and different risk appetites. But, as we said back in the third quarter, and we’re holding to that, for our offshore IOCs, it’s got to be north of $60, probably north of $65, to encompass the majority of them. And it’s got to hold there for a while. Now, it varies. Certainly, deepwater West Africa has a different profile in terms of customers and also the risk appetite versus, let’s say, the more mature North Sea basins. And of course, as you well know, Dave, I mean, it’s just a longer cycle commitment, and that’s where the durability of these commodity prices just have to hang there for a while – and again starting with a 6. I think it’s – and it’s very possible that by the second half, I hope we didn’t come across too negative on the deepwater. We said it’s – the decline in the first half will be more severe in that segment, but there’s no denying the productivity of these deepwater basins, and they’re not going to be ignored. Our peers in the service sector on that area particularly, particularly the subsea companies, they’re working through their cost profile. And I think as that starts to materialize in the FEED studies and so forth, and the FIDs, you’re going to see more of these projects come to pass in the second half. So I mean it does depend greatly on commodity price and the durability of that price. But fundamentally you just can’t ignore what those basins have in terms of productivity.

Q: Martin, IOCs rarely increase their budgets midyear. So your discussion of improvement in the second half of the year internationally, is that from expectations of NOC spending picking up, or are these projects and contracts that you have or will secure during the second half of the year that you feel confident about?

Martin S. Craighead: I agree with what you said, but I also get the feeling that given the uncertainty that’s out there and the hope or anxiousness that its worst is behind us, I’m not so sure that that – budget adjustments midyear won’t be different. And, look, in many, many cases, the budgets are either still in flux or haven’t been formally announced. So we remain – I think second half offshore deepwater is going to have a different complexion.

Q: Okay. So it’s mostly deepwater as opposed to just broadly international that you think will pick up in the second half?

Martin S. Craighead: I think across the board, internationally, offshore that certain deepwater basins will look differently in the second half than the first half, yes.

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