Baker Hughes’ Earnings Continue To Plunge; Company Foresees A Weak Second Half

Despite the sharp recovery of crude oil prices over the last three months, Baker Hughes (NYSE:BHI), the third largest oilfield services company, released depressed June quarter results due to the continued weakness in drilling and exploration demand, and severe pricing pressures. ^[1] While the oilfield contractor’s revenue exceeded the market expectations, its earnings were far off from the consensus estimate for the quarter. The company posted an operating loss in all its geographies as opposed to a loss only in the North American markets in the same quarter last year. This implies that the commodity downturn has severely impacted Baker Hughes’ operations globally, while its closest competitors – Schlumberger and Halliburton – witnessed resilience in their international markets.

Given the deteriorating condition of its financials, Baker Hughes has devised a strategy to weather the current commodity trough, almost immediately post the failure of its merger with Halliburton in May 2016. As part of this strategy, the company aims to improve its operational efficiency by simplifying its organizational structure and controlling its operational costs. The company is on track to realize cost savings of $500 million by the end of this year. Further, it will focus on product innovation while building new and more diversified sales channels. The Houston-based company will also work towards rationalizing a full-service model to enhance its return on invested capital. Lastly, the company plans to optimize its capital structure by buying back shares, and repaying and refinancing its long term debt obligations, while ensuring its financial liquidity. To this effect, the company targets to repurchase $1.5 billion worth of its common stock, repay $1 billion of long term debt, and refinance its $2.5 billion credit facility by the next couple of quarters.

Baker Hughes Strategy Going Forward

Despite its consistent efforts to sustain its margins in the current down cycle, Baker Hughes expects its earnings to remain low for the remaining half of 2016. This is because unlike its peers, who believe that the commodity markets have bottomed out, Baker Hughes anticipates the softness in commodity markets to continue through 2016.

Have more questions about Baker Hughes (NYSE:BHI)? See the links below:

• What To Expect From Baker Hughes’ 2Q’16 Earnings Results?
• How Will Baker Hughes’ Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
• How Will Baker Hughes’ Revenue Move If Crude Oil Prices Average At $50 Per Barrel In 2018?
• What Is Baker Hughes’ Fundamental Value Based On Estimated 2016 Value?
• How Will Baker Hughes’ Revenue And EBITDA Grow Over The Next Five Years?
• How Has Baker Hughes’ Revenue And EBITDA Changed Over The Last Five Years?
• How Has Baker Hughes’ Revenue And EBITDA Composition Changed Over The Last Five Years?
• What Is Baker Hughes’ Revenue And EBITDA Breakdown?
• Baker Hughes 1Q’16 Earnings Continue To Slide As Commodity Prices Remain Depressed
• 2015 Earnings Review: A Tough Year For Baker Hughes Due To Weak Drilling Demand
• HAL-BHI Merger: Is No Action Better Than A Rejection?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Baker Hughes

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1. Baker Hughes Announces Second Quarter 2016 Results, 28th July 2016, www.bakerhughes.com [↩]