Baker Hughes Will Outperform Its Competition

| About: Baker Hughes (BHI)

Baker Hughes Incorporated (NYSE:BHI) is an international company that provides services, products and technology to oil and gas companies. The company has a market cap of $25.1 billion and its stock price is around $56.

Baker Hughes reported fourth quarter and full year 2013 earnings on January 21st. Fourth quarter revenues totaled $5.86 billion, up 10%, from $5.32 billion in the fourth quarter of 2012, and surpassing the Zacks consensus estimate of $5.74 billion. Net income was $277 million, up 29%, from $214 million in 2012. The company reported adjusted earnings per share of $0.62, beating the Zacks consensus estimate of $0.61. For the full year revenues increased 4.7% YoY to $22.3 billion, and net income was down 19% YoY to $1.1 billion.

Overall Baker Hughes increased fourth quarter revenues in the Middle East and Asia by 27% to $1.2 billion. While revenues increased 10% to $1.04 billion in Europe, Africa and Russia and 7% to $2.7 billion in North America. In Latin America operating income was $49 million.

When speaking about 2014, Baker Hughes CEO Martin Craighead said, "Looking forward, we project increased activity in all of our operational segments in 2014 led by 10% rig count growth in international markets and 5% well count growth in the U.S. Overall the company indicated that earnings from the Eastern hemisphere will continue to be strong. Also earnings in North America will improve and the company is working to improve its margins in South America." Apparently investors were happy with the earnings report and the prediction for increased activity in 2014, because on the day of the report the stock price rose $2.59 or 4.7% on over double its normal volume of trade.

Earnings in the Eastern Hemisphere

Recently we have heard a lot about how fracking. (Fracking refers to the procedure of creating fractures in rocks and rock formations by injecting fluid into cracks to force them further open.) Fracking has dramatically increased North American oil and gas production. However each of the large oil field companies cited higher sales in the Easter Hemisphere as the reason for their increased revenues. Martin Craighead said, "In 2013, we posted record revenue driven largely by the Eastern Hemisphere where our operations grew by 14% compared to 2012," and "This success can largely be attributed to meaningful share gains in high growth markets such as the Middle East and Africa."

Baker Hughes was not alone in seeing the Eastern Hemisphere as its primary area of growth. Its two closest competitors Schlumberger (NYSE:SLB) and Halliburton Company (NYSE:HAL) also saw increased growth in the Eastern Hemisphere.

On January 17, Schlumberger reported earnings and its CEO Paul Kibsgaard noted "international revenue grew by $3.2 billion, or 11 percent, from higher exploration and development activity." He further noted "The Middle East, Africa, Asia Pacific and Russia are the emerging markets that have provided the biggest boosts."

On January 21st Halliburton reported earnings and its CEO Dave Lesar remarked, "We achieved record operating income in our Middle East/Asia region as well as six of our 13 product lines."

Baker Hughes Moving Forward

Baker Hughes has seen strong growth in the Eastern Hemisphere and that is likely to continue. However, the company also expects to realize growth in North America moving forward. The large international oil companies like Exxon Mobil (NYSE:XOM) B P Plc (NYSE:BP) and Royal Dutch Shell Plc (NYSE:RDS.A) (NYSE:RDS.B) have all been focusing their exploration and production budgets in the Eastern Hemisphere. They have spent about 70% to 75% of their capital in Asia, Africa and Latin America. However now that these companies are increasing earnings in the oil and natural gas fields of North America, it is likely that Baker Hughes as well as its competitors will see increasing opportunities in North America.

Baker Hughes Stock Assessment

Each of the three major oil field service companies reported earnings between January 17th and January 21st. All three reported higher revenues and net income but only Baker Hughes saw its stock price pop higher. Stock analyst Jim Cramer explained the pop in the stock price this way: (paraphrase) Investors were not expecting much from Baker Hughes, so when it beat earnings and had a positive outlook for 2014 investors piled in. He went on to say that the CEO of Baker Hughes "was practically giddy about the company's future prospects and shares of the company are not done moving higher." He predicted that shares of the stock could move up to $60.


The performance of stocks in the oil field service and supply niche has been about average. Over the last 52 weeks, Baker Hughes stock price is up 26.4% while Halliburton's is up 33.6% and Schlumberger's is up 16.9%. Moving forward it is likely that the stocks of each of the three companies will continue to move higher, but at a slightly slower rate. In addition, each of the companies reported earnings between January 17th and January 21st and only Baker Hughes stock price moved higher. I believe that the move higher was based on Martin Craighead's statement during the fourth quarter earnings conference and the company's outlook for the future. I predict that Baker Hughes stock will outperform Halliburton's and Schlumberger's, and that it will move to as high as $65.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.