Schlumberger Has A Solid Quarter, Baker Hughes Less So

Includes: BHGE, SLB
by: Trefis

Oil field services majors Schlumberger (NYSE:SLB) and Baker Hughes (BHI) released their Q3 earnings on Friday, reporting a mixed set of numbers. The strong performance in international markets helped Schlumberger buck the broader industry trend. The company reported sequential growth in revenues and income from continuing operations of 2% and 3%, respectively.

Baker Hughes, on the other hand, posted more somber results, weighed down by weak North American drilling and a middling international performance. The company posted sequentially flat revenues, while income from continuing operations were down almost 36%. Baker Hughes was also impacted by some non-recurring charges.

Weak North America Forcing Firms To Slow Expansion and Focus On Efficiency

Schlumberger and Baker Hughes reported a drop in North America income before taxes of 12% and 20%, respectively, while revenues remained almost flat. Both companies maintained a cautious tone regarding their Q4 outlook for North America, with budgetary constraints and volatile commodity prices forcing oil and gas companies to slow down drilling activity.

Low natural gas prices continued to dent demand for pressure pumping services, causing an oversupply of equipment in the market. This has led to weaker pricing power and lower margins. Margins are also under pressure on the cost front, as prices for raw materials such as guar gum remain high.

Performance in Canada was surprisingly weak this quarter. Oil field service firms typically see an uptick of activity in Canada during Q3, following the seasonal spring breakup. However, this year the recovery was much slower than expected, with the rig count in the region down about 26% YOY. The pickup in winter drilling is expected to be slower than expected as well.

Renewed activity in the Gulf of Mexico remains a bright spot in the North American market, despite the slight setback this quarter due to the effects of Hurricane Isaac. Business in the region continues to be accretive to the earnings of both companies.

To counter the North American headwinds, the firms have been cutting back on their expansion plans to focus on better resource utilization and new technology deployments. Baker Hughes reported it will cut its capital expenditure by 25% next year. The firms are also turning their attention to rig efficiency, or the number of wells that can be drilled by a rig over certain period of time. Baker Hughes reported that it has increased its rig efficiency by around 15% this year, enabling one rig to complete 4.5 wells per quarter. Enhanced rig efficiency will contribute to higher revenue per rig and better utilization rates.

International Operations

Schlumberger posted strong international results, recording margin and revenue growth. Results were decidedly less stellar for Baker Hughes, which saw its international profitability decline. Schlumberger also benefited from strong activity in Europe, Africa and the Middle East with new contract wins. Baker Hughes was hit by a contraction in activity in Brazil and Norway, and an increase in start-up costs in the Middle East. Both firms expect international margins to improve next quarter.

Latin American operations saw a decline in activity due to rig mobilizations in Brazil and geopolitical concerns in Colombia. Asia and the Middle Eastern operations were positive, particularly in unconventional plays -- an area where both firms have seen lower capitalization in the past. Schlumberger saw progress in its Chinese and Australian unconventional projects, while Baker Hughes continues to make headway in shale gas projects in Saudi Arabia.

The resurgent oil industry in Iraq appears to be firmly on the agenda of both companies. Iraq holds the world’s fourth largest oil reserves, most of which are largely unexploited. Schlumberger has ramped up operations in Iraq, effectively doubling drilling activity in the region in Q3, while Baker Hughes continues to mobilize its resources in the region.

We are in the process of updating our price estimates for Schlumberger and Baker Hughes following the earnings release.

Disclosure: No positions.