Oil Service Giant Profits Rise… But Misses Targets (BHI)

Baker Hughes Inc. (NYSE: BHI) has announced its earnings for the fourth quarter 2007:. 

• The oil services company posted net income of $400.5 million or $1.26 diluted EPS.  This compares to $326.2 million or $1.02 EPS for Q-4 2006 and $389.1 million or $1.22 EPS in Q3-2007.
• Revenue for Q4-2007 was $2.74 Billion, up 12% compared from the $2.45 Billion for Q4-2006 and up 2% compared to $2.677 Billion for Q3-2007.

There is just one small problem here.  First Call had its consensus estimates pegged at $1.28 EPS on $2.79 Billion in revenues. Baker Hughes is one of the top three holdings in the Oil Services HOLDRs (AMEX: OIH).  Recent earnings out of Schlumberger Ltd. (NYSE: SLB) were also a bit weak on the surface, and its shares are down marginally since then.

There are a couple things noted that may be part of the estimate miss. A softer than expected North American market was hinted at on the Baker Petrolite and Centrilift segment(s), although it noted strong results there.  Drilling and Evaluation segment reported decreased profits as lower than expected activity in the Gulf of Mexico, a more competitive market in North America, and a labor disruption in Algeria affected results.

There are also a couple comments out of Chad Deaton, CEO: "In North America we expect no more than moderate increases in spending in 2008 because strong drilling activity has brought natural gas production growth roughly into balance with demand growth…. Outside of North America, we expect growth to continue in 2008, but at a somewhat slower pace than in recent years…."

We still think that the company’s $2 Billion shelf offering might be used for making an acquisition.  During the quarter, Baker Hughes repurchased 3,000,000 shares of its common stock at an average price of $81.75 per share for a total of $241.5 million.  The company’s diluted EPS for the fiscal year grew some 15% to $4.73, so its new trailing P/E ratio is 16.3.

The stock closed down over 0.5% yesterday at $73.44 and unfortunately it is far too early in pre-market activity to see any real indications as of yet.  The good news is that is already well off of highs as its 52-week trading range is $62.26 to $100.29.  If shares weren’t down 25% since October and down about 10% already in 2008, we’d probably be bracing for a pretty big hit for this stock.

Jon C. Ogg
January 30, 2008