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Oilfield services provider Baker Hughes (NYSE:BHI) will release its Q2 results on July 20. We expect Baker Hughes to report low growth and declining margins in the North America geography, which contributes a major portion of its overall valuation. Low natural gas prices in the U.S. have resulted in a major realignment in the exploration and production (E&P) industry in the region. Additionally, the industry margins have suffered because of logistical and operational changes, as well as the rising cost of key input prices. International revenues are expected to show sequential as well as annual growth.

We will revisit our $56.42 price estimate for Baker Hughes, which is at a 40% premium to the current market price, after the earnings result.

North American slowdown

Energy prices saw a fall in the past quarter as natural gas prices in the U.S. declined to their lowest level in the past decade, forcing producers to cut production activity in gas plays and instead focus on liquids production. The changes in the industry have forced companies to realign their logistics, which has resulted in lower operational efficiencies. The concentration of industry pressure pumping capacity in liquid plays is also forcing lower pricing. Companies have also been hit by the rising costs of key raw materials. In particular, the rising cost of gaur – a legume used in fracking fluid – has hit the industry margins as the service providers are finding it difficult to transfer the costs to producers.

Upstream activity may also be hit by the drop in oil prices, which have fallen in the past few weeks because of the weak economic scenario in Europe and emerging markets such as China. Despite this, we expect strong growth in offshore activity in the Gulf of Mexico where explorers have acquired licenses for fresh activity.

International market

The rig count in international markets published by Baker Hughes shows an increase in most international geographies over the past year. The relatively high prices of oil and the increasing interest in unconventional exploration are expected to result in long-term growth in rig count in these geographies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Baker Hughes Is Cheap But U.S. Slowdown Could Hit Earnings