Baker Hughes - Q1 2012 Review

By Eric Fox | April 30, 2012 AAA

Baker Hughes (NYSE:BHI) reported lower margins in its North American segment in the first quarter of 2012, as the company's domestic operations suffered from both industry- and company-specific issues.

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First Quarter of 2012
Baker Hughes reported pretax margins of 14% in North America in the first quarter of 2012, down from 19% in the same quarter of 2011. North American margins also dropped sequentially from the 15% level reported in the fourth quarter of 2011.

SEE: What Determines Oil Prices?

Issues
The shift in development away from natural gas plays has led to a migration of oil services capacity to oil and liquids areas. This shift, along with the addition of new capacity, has led to pricing pressure in the market for hydraulic fracturing services.

The problems that Baker Hughes faced in the first quarter of 2012 were not unique and affected many of its peers. Both Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) also reported weaker margins in North America in the first quarter of 2012.

Baker Hughes also suffered from supply chain issues that are specific to the company, but expects these to abate by the second half of 2012.

None of these issues came as a surprise to investors, as Baker Hughes preannounced weaker North American results in late March 2012.

SEE: Oil And Gas Industry Primer

Pricing Pressure
Baker Hughes estimates that the pricing pressure in hydraulic fracturing services will last through the end of 2012. The company reported no pricing pressure in other oil service lines offered by the company.

International Segment
Baker Hughes reported strong business conditions in the International area, and highlighted the company's operations in the Europe/Africa/Russia segment. The company said that it worked on a number of high impact wells in Nigeria, Mozambique and Angola during the quarter. Baker Hughes reported pretax margins of 17% in the Europe/Africa/Russia segment in the most recent quarter, up from 11% in the same quarter of 2011.

Anadarko Petroleum (NYSE:APC) is one of the exploration and production companies working in Mozambique. The company recently reported the success of the Barquentine-4 well capping off its appraisal program of Offshore Area 1 of the Rovuma Basin.

Eni (NYSE:E) has also found success in offshore Mozambique and recently raised its estimate of the potential resources here to 40 Tcf of natural gas in place.

SEE: A Guide To Investing In Oil Markets

The Bottom Line
Although Baker Hughes reported weaker results in North America, the company's strong International operations offset this disappointment. These financial results were also in line with the company's pre-announcement and should not have shocked investors that follow the sector closely.

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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