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Baker Hughes Anticipates a Mixed Bag in 2016

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Baker Hughes’s segmental performance

From 2Q15 to 2Q16, all of Baker Hughes’s (BHI) segments saw revenues drop. Its North America operations suffered the biggest revenue decline (55% fall), while the Industrial Services segment was the most resilient (~11% fall). In comparison, Oceaneering International (OII) saw its revenue drop 23% in 2Q16 over 2Q15.

In terms of adjusted operating income, BHI’s North America segment saw its operating loss deteriorate in 2Q16 compared to a year ago. BHI’s Europe/Africa/Russia Caspian operations were severely affected, switching to an adjusted operating loss in 2Q16 from an operating income a year ago. Even the Middle East and Asia region’s operations and the Industrial Services segment turned to adjusted operating losses in 2Q16. Adjusted operating income excludes merger-related costs.

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Factors that affected BHI’s 2Q16 earnings

  • A 35% lower North America rig count in 2Q16 compared to a year earlier was led by a steep drop in US onshore activity.
  • Lower prices for BHI’s products and services negatively affected its North America results.
  • BHI saw activity reductions in offshore Mexico operations and reduced revenue from Ecuador.
  • Reduced activity, pricing pressure, and unfavorable product and geographic mix negatively affected BHI’s North Africa, Nigeria, United Kingdom, and Angola regions.
  • A steep rig count fall in Australia affected BHI’s Asia Pacific region operations negatively.

However, cost saving from restructuring activities and the favorable impact of foreign exchange rate movement in many of BHI’s international operations partially mitigated these negative factors. Baker Hughes makes up 0.1% of the iShares Core S&P 500 ETF (IVV). The energy sector makes up 7% of IVV.

Baker Hughes warns of further international activity drop

Baker Hughes’s management believes that international upstream operations will continue to face pressure. Some of the countries where drilling costs are high may see sharp activity reductions. Baker Hughes anticipates some headwind due to the price drop in oilfield services companies’ services and products. Management believes prices have bottomed out in many US basins. The company also expects margins to improve sequentially as the benefits of BHI’s various restructuring efforts start to yield results.

Next, we will discuss Baker Hughes’s returns.

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