Current BHI Stock Info

Large projects need stable higher oil

Baker Hughes (ticker: BHI) announced first quarter results today, showing a net loss of $129 million, or ($0.30) per share. After adjusting for impairments and merger-related costs, Baker reports a loss of $15 million, or ($0.04) per share. Both results exceed those of Q4 2016, when the company reported adjusted and non-adjusted losses of $701 million and $981 million, respectively.

Unlike Halliburton and Schlumberger, Baker Hughes’ revenue in North America fell 8% sequentially. This is due in large part to Baker’s deconsolidation of its pressure pumping business.

Baker reviving BJ Services as pressure pumping spinoff

In late November, Baker Hughes announced that it would spin off its North American pressure pumping business as BJ Services, a private company held by Baker, CSL Capital Management and West Street Energy Partners. Baker provided its North American land cementing and hydraulic fracturing businesses, while CSL contributed its Allied Energy Services product line and CSL and WSEP together contributed $325 million in cash. CSL and WSEP received 53.3% of the company, while Baker retained 46.7% and received $150 million in cash.

If the $83 million of onshore pressure pumping revenue is excluded from the Q4 2016 results, North American revenue was up $20 million or 3% sequentially. Baker’s most significant growth in North America is a direct result of the drilling resurgence. According to Baker CEO and Chairman Martin Craighead, drill bits and rotary steerable systems saw significant growth in first quarter 2017.

Sustained Mid-$50 Oil Needed for Service Pricing Recovery: Baker Hughes

Source: Baker Hughes Investor Presentation

International markets bottomed out

International and offshore markets continue to be impacted by the lower price environment. While Baker Hughes believes that international onshore activity has bottomed and will remain stable or grow slightly, pricing has not improved. Craighead commented on offshore activity in Baker’s conference call, reporting “Offshore, both internationally and in the Gulf of Mexico, activity and pricing continued to decline, as the current oil price environment dampened customer confidence in achieving economic returns using existing technology for those longer cycle projects.”

Craighead believes that prices must “stabilize and be sustained in the mid-to-high $50 range” for investment to accelerate. Full service cost pricing recovery will not be achieved until excess service capacity is absorbed, and according to Craighead this will not happen until higher prices drive increased investment.

Sustained Mid-$50 Oil Needed for Service Pricing Recovery: Baker Hughes

Source: Baker Hughes

GE Oil & Gas + BHI merger on schedule for mid-2017 close

Baker Hughes reports that its merger with GE Oil & Gas is proceeding on schedule, with expected closing in mid-2017.

“Every element of the Baker Hughes strategy that we’ve laid out for you over the last 12 months,” Craighead commented, “is enhanced and accelerated by the buckling up with GE Oil & Gas. New product development is going to be accelerated via access to the technology, breadth and depth within the GE store.”

Q&A from BHI Q1 2017 conference call

Q: Can you help us frame North America with BJ now deconsolidated? Just the size of U.S. land versus Canada versus Gulf of Mexico? Clearly, Gulf of Mexico was the biggest headwind in Q1 and some follow through in Q2. But, could you just help us size those different businesses? Just trying to get a feel for the mix within North America, again, with now that the North America land pressure pumping business is no longer consolidated.

BHI VP and CFO Kimberly A. Ross: So, if you look at it, we said in the notes – prepared remarks – that approximately 25% of our business is chemicals. If we then look at it, it’s about 60% is U.S. land and the remaining is Gulf of Mexico.

Q: And then on the international side, Martin, I think your commentary with regard to pricing is similar to your primary competitors. And is it confined to a few geo markets and customer types or is it more broad-based? And just curious if you can provide some incremental color as to what’s driving this – what seems to be renewed pricing pressure on the international side.

Martin S. Craighead: I wouldn’t say it’s renewed. And I’d say the intensity, if you will, of negotiations and tenders has been pretty consistent. But what you do have is a roll-through now of renewals on contracts, which is starting to impact the bottom-line. And as you heard Kimberly say, we had some restructuring charges, some of that was in the Eastern Hemisphere to get the top-line and the cost structure better aligned as these previously agreed upon discounts roll through.

As to severity by region, what comes to mind particularly is the continent of Africa, parts of Latin America, then the severity is pretty dramatic, frankly, simply because there is not enough work in some cases for the number of suppliers that have traditionally been there. So it’s a bit of a street fight. But I wouldn’t say necessarily it’s gotten any worse, I think, but from a numbers perspective just starting to see the manifestation of some of these prior agreements come into play.

The other thing that I’m not sure is fully understood is that these aren’t necessarily take-or-pay agreements. These are agreements and they are contracts. But as – you’ve been in this business a while, as you see activity start to rebound in some of these places with so much capacity coming back out, just like the customer community engages their suppliers to try to get their costs in line, the service community is pretty doggone good as well at reengaging with the customers to make sure that even in the middle of, so to speak, contracts and agreements, we’ll reengage to make sure that we’re getting the fair price relative to the market. So these things can change pretty quickly as well.

Analyst Commentary

From Capital One:
• '17/'18 ests to -4c/$1.60 from 29c/$1.63 as we layer in a more conservative NA that's due to slower growth in chemicals and lift along w/ further GOM headwinds. Ests are coming down slightly, but the long term is still tied to pro-forma '20 EBITDA and possibly a higher synergy number upon GE/BHI closing in mid yr.
• 2Q NA growth is expected to be up modestly as chemicals track production growth and well construction performs well, but this is being mostly offset by GOM headwinds and the Canada breakup. Until the GOM bottoms, NA results will continue to be clouded; however, it's now apparent that BHI's US land biz will likely lag the rig count during the cycle due to its artificial lift and chemicals exposure. Int'l revs are expected to be flat q/q as further pricing deterioration and a soft offshore offset the seasonal bounce in EARC.

From SunTrust:
BHI's adjusted 1Q17 loss per share of ($0.23) was below our ($0.20)
estimate and the ($0.21) consensus estimate. BHI's adjusted loss per share of ($0.23) excludes -$0.26 after-tax for restructuring costs, asset impairments and merger related costs, and +$0.20 for recovery of bad debt in Ecuador, which relates to prior periods, with +$0.01 in rounding differences. The miss relative to our estimates was driven primarily by higher than expected SG&A and Research & Engineering expense.

We think these results will be modestly negative for BHI shares, with the ultimate near-term impact to be dictated by more detailed outlook comments on today's conference call.

Total revenue was within 1% of our estimates with revenue in OFS slightly lower than expected, mostly offset by Industrial & Other revenues 12% above our forecast. Margins were a mixed bag, with modestly better than expected margins in NAM, and much better than expected margins in Europe/Africa/Russia/Caspian, offset by lower than expected margins in Latin America, Middle East/Asia Pacific and Industrial. See the following pages for a comparison of BHI's reported results with our estimates.  

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