Baker Hughes Places Blame for Lowered Outlook

March 21, 2012

Baker Hughes Inc (NYSE:BHI), like other drilling-services companies, is feeling the pinch as energy companies shy away from natural gas drilling while the commodity’s prices hit bottom. The company has lowered its first-quarter outlook with the expectation that its profit margin will fall as the market shifts, reported Reuters.

Baker Hughes stock, which in the last year has lost 30 percent of its value, slipped 4 percent Wednesday morning on the New York Stock Exchange, bringing it to its lowest level in more than a year at $45.50. The Dow Jones U.S. Oil Equipment and Services Index fell 2.47 percent.

The third-largest oilfield services company has cut its first-quarter outlook saying it expects its pretax operating profit margin to decline in the first quarter as North American rig activity shifts to liquids from natural gas. Baker Hughes forecast first-quarter North America pretax operating profit margin at 13.2 percent to 14.2 percent, compared with 18.7 percent in the fourth quarter. Raymond James analysts reportedly said the forecast was 300 basis points lower than their expectation.

Costs are rising throughout the industry due to the shift, and most oilfield services companies are rushing to move their rigs to oil and natural gas liquid fields, where activities are picking up, said Reuters. Natural gas prices hit a decade-low in January of $2.22 per million British thermal units, prompting companies like Chesapeake Energy Corp (NYSE:CHK) to limit drilling in dry gas areas. Baker Hughes said it’s also seeing lower prices and shortages of raw materials in its pressure pumping business, which taps shale fields with hydraulic fracturing.

“Pressure pumping in North American markets will continue to experience pricing pressures, supply chain and raw material constraints, and execution issues will weigh on North American markets results through the second half of 2012,” Global Hunter Securities analysts said in a note. The brokerage downgraded the company to Neutral from Accumulate and cut its price target on the stock to $40 from $60.

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