Baker Hughes Destroys Four Years Of Gains (BHI)

Lower and lower oil prices are good for the broader economy, but they are bringing pain to the oil patch.  Oil services giant Baker Hughes Inc. (NYSE: BHI) is demonstrating this more than any other major player today after earnings.  The company’s earnings of $1.29 per share missed analysts’ estimates of $1.35.  There are issues here, and the stock is paying the price for it.

What is interesting is that revenue actually rose more than 12% fromQ3-2007 to $3.01 billion, but that is still short of the $3.09 billionestimate from First Call.  Outside of North America revenue was up 11% from Q3-2007, but down 1% sequentially.

While the company said that the hurricanes took away $0.11 from earnings, it also noted that the results included a $0.10 one-time taxbenefit.

It is growing impossible to not recognize that the global energy sectoris not facing issues of its own with lower and lower energy prices.While its CEO said that the long-term outlook is favorable, he notedspecifically that the near-term outlook has become less certain.  Healso noted that he Baker Hughes customer base will factor lowercommodity prices and slower global demand growth into their budgets anda lack of credit may impact customer spending.

Another issue is thelack of commercial credit and above-demand natural gas production willyield decreased gas drilling into next year.  The company even notedthat international spending outside of North America will be moremodest in 2009 over recent years.

What the company is saying is that it is facing a more realisticand more normalized environment than what we have seen over the last two to three years, and the slowdown is going to create anenvironment where oil and gas services operations will have to be morecompetitive.  All of this is going to lead to a muchless boom town feel inside these companies. 

Baker Hughes stock is down 16% at $32.50 right after noon today.  Thiswas an obvious 52-week low, but it is actually far worse.  At the endof August, this stock was north of $80.00.  After looking through thecharts and quote recaps, we have to go back to January of 2004 to findshare prices that low.  Oil was trading in the mid-$30’s per barrel atthat time.  The difference is that oil was rising and had been comingoff of multi-year low levels at the time.

At $120 and higher oil the profits for firms were astronomical.  As pricesrose sharply last year the oil patch was cheering with wild profits at$90.00 oil.  But the destruction in demand and the general slowdownaffecting growth rates in Asia, Latin America, and Africa is puttingimmense pressure.  Go ahead and throw in de-leveraging of funds andtrading operations to boot.  Oil is down $4.00 today and is challengingthe sub-$68.00 mark. 

Hell, if this continues airlines might even be able to run at profitable levels again.

Jon C. Ogg
October 22, 2008