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Things Are Better at Baker Hughes Incorporated (BHI) Than You Might Think

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If you’ve looked at Baker Hughes Incorporated (NYSE:BHI)‘ recent results, you may be convinced that the company is struggling somewhat. But while its quarterly results were hardly the stuff of things to write home about, you’d be wise to expect a strengthening in the second half of 2013.

True, Baker’s quarter wasn’t close to being as solid as that posted by Schlumberger Limited. (NYSE:SLB), which also reported last Friday, in its case a $0.05 beat vis-a-vis analysts’ expectations. Nor did it match Halliburton Company (NYSE:HAL), which followed up today by also topping the consensus, albeit by only a penny. The three companies, along with Weatherford International Ltd (NYSE:WFT), typically are lumped together as a foursome of large, diversified providers of oil-field products and services.

How’d the company do?
For the quarter, Baker Hughes Incorporated (NYSE:BHI)’ net income was $240 million, or $0.54 per share, down from $260 million, or $0.60 per share, for the second quarter of 2012. If you back out one-time items, however, the company’s per-share number comes to $0.61, a miss from the consensus expectation of $0.65. Revenue rose 3% to $5.49 billion.

Baker Hughes Incorporated (NYSE:BHI)North and South America were the keys to the company’s lower than expected results. Our continent was affected by, among other things, unusually strong seasonal weakness in Canada, which led to a 70% drop in the rig count. While overall pre-tax margins slid to 9%, from 13% a year ago, the margin attributable to North America was 8%, compared with 14% year on year. It’s worth noting, however, that, in the Gulf of Mexico, increased activity helped propel the company to strong sequential hikes in revenues and profits.

A newly hot Latin American country
Internationally, revenues of $2.5 billion were 7% above the year-ago second quarter. The delta would have been higher, but for lower revenue in Brazil, where the company is now working under a new drilling contract at lower prices. In Mexico, weak interest in bidding on acreage in the Chicontepec Basin in the country’s north has resulted in a virtual shutdown of the play, an event that negatively affected Baker Hughes Incorporated (NYSE:BHI).

Nevertheless, all was not lost in Latin America. Baker Hughes Incorporated (NYSE:BHI) has received a major contract to provide services for unconventional development in Argentina, which has suddenly become active, largely on the basis of the Vaca Muerta shale, which is thought by some to contain the world’s second- or third-largest volume of shale reserves. Chevron Corporation (NYSE:CVX), for example, has committed to spend $1.24 billion in the play through the end of 2014 in a pilot development program.

Slowing the decline
And there are other bright spots at the company. As CEO Martin Craighead noted on the company’s post-release call, Baker Hughes Incorporated (NYSE:BHI) continues to develop new production technologies. The focus has been on three areas: increasing well complexity, improving drilling efficiency, and improving ultimate recovery.

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