Tuesday, 21 January 2014

Baker Hughes - lots of moving parts: wait

I have not reviewed the US-listed oil drill and related services company Baker Hughes formally before.  Today's Q4 disclosure gives me that opportunity. 

The macro theme for oil services is pretty clear...spend more in order to give the opportunities to find oil/gas:

But looking at the Baker Hughes numbers, the earnings bridge was downright mixed, even ex the disruption in Iraq, earnings would have been slightly down quarter-on-quarter.  Why do I feel this is the norm for the oil services space?


Over the full year operating earnings may have been slightly down to US$1.9bn but revenues were up 14%.  And the reason why as per the company? (my emphasis added):

'This success can largely be attributed to meaningful share gains in high growth markets such as the Middle East and Africa.  In our Middle East/Asia Pacific segment, we grew revenue 24% during the year, with solid improvement in profitability compared to last year.  In Latin America, we realigned our business to drive better profitability ending the year with 12% operating profit margins.  In the U.S., we achieved four consecutive quarters of improved profit margins in our Pressure Pumping product line'

The Middle East and Europe/Caspian areas in combination are not only bigger than the US but also generate a higher margin (12%+) versus just 9% in the US (although as noted above this has improved over the last year).

My view, coming to the company afresh, is that even with 10% rig count growth in international markets and 5% well count growth in the U.S. the company is likely to be trading on over x12 EV/ebit unless margin evolutions really surprise. 

The company does have positives including a balance sheet that has debt equal to only one times ebitda, free cash flow generation and a buying back of shares (equal to c. 0.5% of share capital).  The share also remains well off its 3 year highs.

There seems like a lot of messiness here and the US$50 level is closer to a single digit EV/ebit ratio plus the share has exhibited resistance/support at that point too.  Given I don't feel too excited extrapolating the recent 2013 numbers and applying a x12-14 EV/ebit ratio onto them to justify the share price, I am going to keep a waiting brief. 


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