Baker Hughes Reports Decent Quarter; Profitability Gap Remains Stark

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Baker Hughes reported a respectable quarter during a difficult North American drilling environment while dealing with negative seasonal effects. Revenue was $5.23 billion, down 2% from the prior quarter and prior year. Operating profit of $455 million was up 3% from the prior quarter, yet down 27% from the prior year. Overall operating margin at 10% was similar to the last quarter, but down from 13% in 2012. On a positive note, the Middle East is now Baker Hughes’ largest international segment, and the firm recently added pressure pumping services to the region.

However, on a negative note, profitability remains well below industry leader Schlumberger SLB , which reported 19% operating margins overall and in North America, and 20.5% international margins. Baker Hughes’ North American margins sit at 9%, and its international margins are at 11%. Revenue performance is also lagging, as Schlumberger reported a 4% drop in North American revenue from 2012 levels while Baker Hughes reported a 9% decline. Schlumberger’s international revenue increased 13% year over year, while Baker Hughes’ revenue increased 5.7%, which is lower than the overall international rig count increase of 7%.

Analysts acknowledge Baker Hughes’ position as a leader in offshore work (along with Halliburton HAL and Schlumberger), which should be a huge tailwind for the firm as offshore activity continues to ramp, but the company still seems to be struggling elsewhere, despite the large opportunities for organizational improvements that it has already identified. CEO Martin Craighead is a little more than a year into his tenure, and he needs to deliver stronger results given he has far more low-hanging fruit than Schlumberger to target. As it stands, the complete success of the product line to geomarket reorganization may still take a few more years to play out, but Baker Hughes needs to keep pace with peers during this learning process to fully realize its ultimate benefits.

 

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