Baker Hughes: Too Many Problems

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Baker Hughes (NYSE: BHI) operates in the oilfield services industry. The company is a supplier of oilfield services, products, technology and systems to the international oil and natural gas industry. It also offers industrial and other products and services to the downstream refining. Baker Hughes is in the middle of a big transition. Big transitions are hard, even more challenging when they require moving away from something that has, by most accounts, enjoyed success.

 The non-delivering transition strategy, lower profit margins, several non-recurring items and the challenging market conditions are the factors responsible for the declining stock price of the company.

Weak Earnings

Oilfield services provider, Baker Hughes, in its third-quarter earnings posted a meek increase in revenues of 3%, with results dropping short of Street estimates on lower than expected activity in several key markets.

The company experienced several non-recurring items that affected the results, and experienced challenging market conditions.

The burden pumping market remains unstable due to surplus capacity. This imbalance drove pricing pressure and stressed profitability as the industry works to bring it into line to this market reality. Besides this, some of its customers are postponing activity, specifically mid-cap North America for various reasons, including budgetary issues over leveraged balance sheets and uncertainty over future commodity prices.

Competitors Faring Better

<img height="257" src="http://www.valuewalk.com/wp-content/uploads/2012/12/BHI-and-competitors.jpg" width="712" />

Baker Hughes reported worse results than Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL). In NAM, BHI reported operating margins of 11.7% versus 18.5% for SLB and 15.1% for HAL. In terms of consecutive changes, Halliburton reported 556bp decline in NAM margins, versus 223bp decline for SLB and 165bp lowering for BHI. BHI reported steeper margin decline than competitors owing to its higher exposure to Canada, which was incrementally better than 2Q12, even though it managed much inferior than last year. On the international front, SLB also showed the best margin improvement, and its margins increased by 78bp, versus 35bp for HAL. BHI reported a decline in margins, falling by about 290bp. Similarly differential performance from SLB/HAL was obvious in international revenue growth. SLB reported 2.8% international revenue growth between 3Q12 and 2Q12, versus 2.4% for HAL. BHI, on the other hand reported a 1.7% downside in revenues.

Transition Strategy

It's been over three years since the company boarded on its high-profile determination to convert from a quite decentralized provider of oilfield products and services, to one strong-minded to strive via a prolonged and deeper global footprint, and more cohesive suite of products and services. Till now the company has not fully materialized its strategic plans.

Though the company gained customer satisfaction ratings in EnergyPoints independent customer satisfaction surveys that were very closely competed with the rivals namely Schlumberger and Halliburton  and somewhat with Weatherford, but the long position in the company is a bit skeptical at this point in time, due to the sharp decrease in its Quarter 3 results.

The company announced its strategy in 2009 and since then overall customer satisfaction has declined 8.9% on an adjusted basis. This is in comparison to an average decline of 2.5% for its major competitors.

One more concern for the company has been the response to the change in its culture over the last few years. Many customers and employees lament the decline of performance at the individual level. The company claimed too much transition and did only a little. A surfeit of competing enterprises, along with unpredictable implementation, hasn’t helped. New and old employees alike seem confused as to the company's primacies.

The company also restructured around geographic markets, missing from a product- and service-line orientation. This step appeared to inspire superior bundling and packaging of offerings, an approach studies by EnergyPoint and others suggest this typically leads to diminished customer experiences.

Fourth Quarter Outlook

Baker Hughes dropped its fourth-quarter outlook for revenue and margins in its North American operations among lower-than-expected onshore activity and sustained pressure-pumping price declines. The company still expects that margins will be similar to the third quarter. In the North American segment, Baker Hughes anticipated adjusted operating margins of 8.5% to 9.5% for the quarter, compared with the 11.7% recorded for the third quarter.

Conclusion

Among all the dim news, the oil services firm has been making inroads in Iraq, by winning a number of contracts. But in Iraq also firms operations have been slow to pick up, and it is also struggling from high start-up costs. The company had lower profit margins due to slowdown in North America pressure pumping activities, used in Hydraulic fracturing. The Canadian activity was nearly 30% lower than the year earlier. The total rig count in markets, such as Brazil, Colombia, and Norway declined by 17% in the third quarter. Baker Hughes currently is engulfed with various problems (already mentioned), so until it finds a solution to overcome the hurdles, investors will be watching its stock from the fence.


valuewalk has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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