|Baker Hughes Inc. (BHI): Maintain Buy rating - Goldman Sachs|
Baker Hughes announced that 2Q2007 EPS is expected to be $1.07-1.09 versus consensus and our estimate of $1.18. Variance to our estimate is primarily due to weaker-than-expected results from Drilling and Evaluation attributable to decreased activity in Canada ($0.05-$0.07). Our estimates are currently under review. Analysis Approximately 50% of the miss is due to Canadian weakness, where the rig count was down 50% yoy and 72% sequentially. The other 50% is due to two nonrecurring items: (1) higher-than-expected tax rate due to a one-time charge ($0.03), i.e., the normalized tax rate is not expected to be higher than previously expected, and (2) higher repair and maintenance cost at INTEQ ($0.02); however, we do not expect to exclude this from earnings. We expect INTEQ profitability to return to normal following this quarter.
(1) We maintain our Buy rating for Baker Hughes shares. We remain confident in the company's international growth profile and ability to improve operations at Baker Oil Tools and Baker Atlas. (2) Weatherford's shares (Buy) are also likely to be weak on the news, and we see greater risk to 2Q earnings; however, Weatherford`s exposure to heavy oil exposure should help. (3) Other companies likely to be negatively impacted are Oil States and BJ Services. (4) Overall we believe investors have high expectations for 2Q earnings season given the sector's recent multiple expansion and outperformance relative to commodities. Given the negative sentiment that is a likely result of a potentially uninspiring earnings season, we do not see near-term catalysts to further fuel the rally in the sector and believe a pullback is likely. We would view a pullback in the 5%-10% range as an attractive entry point for investors with a 6-12 month time horizon.