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   Gold/Mining/EnergyBaker Hughes


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To: Dennis Roth who wrote (9)4/27/2006 6:12:42 AM
From: Dennis Roth
   of 18
 
BHI (NR): Best 1Q among the Big 3 - Goldman Sachs - April 26, 2006

We raised our '06/'07 EPS forecast by $0.40/0.48 to $4.02/$4.84 due to both higher growth assumptions and stronger incrementals. Among the Big 3, BHI posted the strongest 1Q performance relative to expectations with the highest sequential incrementals in the group. BHI's performance made up for the low incrementals in the 4Q05 compared to peers. First quarter results continue to suggest that pricing power remained strong across the board. This quarter, the benefit of price increases was most visible in the case of BHI. BHI is Not Rated.

(Goldman Sachs & Co., and or one of its affiliates is acting as advisor to Baker Hughes Incorporated in the proposed sale of its interest in WesternGeco to Schlumberger Limited. Goldman Sachs & Co., and or one of its affiliates will receive a fee for this advisory role).
HAL (OP/A) is still our favorite stock among the Big 3.

COVERAGE UPDATE: HAL IS STILL OUR FAVORITE AMONG THE BIG 3 - We continue to prefer HAL among the large caps. We still think that Exploration and Pressure Pumping should show the best pricing power/incrementals over the next 12-18 months. 1Q06 results seem to support our view that pricing power is strong for Exploration (e.g. Strong seismic, wireline and directional results across the board) and Pressure Pumping (both HAL and BJS reported strong results and announced price increases that should benefit upcoming quarters). Therefore, subject to normal quarterly lumpiness, we believe SLB (Exploration) and HAL (Pressure Pumping) have more room to beat estimates over the next 12-18 months than BHI.

IMPLICATIONS FOR THE INDUSTRY: STRONG PRICING POWER - All Oil Services companies that have reported so far indicated that pricing power remained strong across the board, with North America leading the way. "Leading edge" prices also seem solid in international markets. And even though the impact of international price increases on margins is more gradual (because of the more contract-oriented nature of these markets), it should provide a good base for healthy incrementals for the industry over the coming quarters.

BHI INCREMENTALS CATCH UP AFTER A WEAK 4Q05 - This quarter, the benefit of price increases was most visible in the case of BHI, which posted sequential incrementals of 114%, versus SLB's 68% (ex-WesternGeco) and HAL's 70% (ex-KBR). Even though the 1Q performance is certainly a big positive for BHI, it is prudent not to overstate its importance since sequential incrementals are always volatile. For instance, BHI's outperformance this quarter basically compensates for the company's weak 4Q05 incrementals of 28%, vs. SLB's 40% and HAL's 37%. In fact, using annual numbers (more robust metric and less volatile) BHI's incrementals of 43% are very similar to SLB's 39% and HAL's 43%. (Note: We tried to allocate corporate expenses and eliminations to make the numbers more comparable among the companies. Therefore, they may differ from incrementals calculated before corporate expenses. The conclusions of our analysis would be the same even if we did no adjustments. The 1Q06 sequential unadjusted incrementals for BHI/SLB/HAL are 92%/67%/81%)

WHAT TO WATCH FOR:
(1) Pace of the share buyback;
(2) Ability to improve Completions & Production division growth/margin performance to narrow the gap relative to the stronger Drilling and Evaluation division; and
(3) Execution of Eastern Hemisphere growth strategy.

RAISING ESTIMATES: We raised our '06/07 EPS forecast by $0.40/0.48 to $4.02/$4.84. The key drivers for our increased estimates were higher incremental margins and slightly higher revenues. The divisions with the largest increases were: Baker Atlas, Inteq, and Hughes Christensen. The $0.40 increase in our 2006 EPS estimate can be broken down as follows:
(1) Drilling and Evaluation (+$0.33);
(2) Completion and Production (+$0.14);
(3) Sale of Western Geco (-$0.20);
(4) Net interest expense (+$0.08);
(5) Share buy-backs (+$0.06); and
(6) other non-operating items (-$0.01).

Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Daniel Henriques, CFA, and Daniel Boyd, CFA.

============

BHI (NR): Strong 1Q with impressive incrementals April 26, 2006

Baker Hughes 1Q06 EPS of $0.93 beat our $0.76 estimate and consensus of $0.78. Revenues were 5% above our estimates and EBIT margin of 21.4% was 310 bps better than expected due to strong incrementals (114% sequentially). BHI operating performance relative to expectations (EBIT 23% above our estimate) was stronger than SLB (5% above ex-WesternGeco) and HAL (7% above ex-KBR). Eastern Hemisphere revenues were -2% sequentially compared to SLB's -1% and HAL's -4%, while North America revenue growth of 12% compares with SLB's 18% and HAL's 12%. Guidance of $3.90-4.20 (ex- WesternGeco 1x gain), up from $3.40-3.60, is above our $3.62 est and consensus of $3.57. Revenue growth guidance of 23-25% is also higher than our 21%. BHI is rated NR. We prefer HAL (OP/A)+ SLB (NR), but BHI's strong 1Q and the recent increase in buyback authorization should lead to strong near term performance.

(Goldman Sachs & Co., and or one of its affiliates is acting as advisor to Baker Hughes Incorporated in the proposed sale of its interest in WesternGeco to Schlumberger Limited. Goldman Sachs & Co., and or one of its affiliates will receive a fee for this advisory role).

CONFERENCE CALL DETAILS BHI's conference call will begin today [ Edit: Yesterday ] at 8:30AM (ET). The dial-in number is (800) 374-2469.

Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Daniel Henriques, CFA, and Daniel Boyd, CFA.

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From: Dennis Roth4/26/2007 8:18:22 AM
   of 18
 
Turnaround still has legs; Raising estimates – Reiterate Buy April 26, 2007 - Goldman Sachs

What's changed

Baker Hughes posted strong 1Q07 results. We raised our 2007/2008 EPS forecasts by $0.18/$0.19 to $4.92/$5.84. We also raised our 12-month price target by $2 to $84 (12.5x 2007 EV/DACF) based on higher estimates.

Implications

We reiterate our Buy rating for Baker Hughes shares. The solid 1Q07 operating performance demonstrates that the company is making progress in terms of execution after two very disappointing quarters. We still believe there is room for further margin expansion and we see upside potential to our revised estimates and to company guidance if execution continues to improve over the coming quarters. The compounded impact of upwards EPS revisions and multiple expansion should lead to outperformance relative to the group over the next several months.

Valuation

Even after Wednesday’s rally, Baker Hughes is still trading at a discount to peers. For instance, in terms of 2007 EV-DACF/P-E Schlumberger is trading at a 24%/21% premium to Baker Hughes versus historic (versus historic ~12%/~14%). Baker Hughes is trading at a 2007 EV-DACF/P-E of 11.7X/15.9X, versus 12.6X/16.2X for Halliburton and 14.5X/19.3X for Schlumberger.

Key risks

Key risks to our thesis include: (1) A U.S./Global recession could result in weaker commodity prices and further E&P capex cuts; and (2) Weakness in natural gas prices could lead to further E&P capex cuts in North America.

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From: Dennis Roth7/15/2007 5:12:17 AM
   of 18
 
Baker Hughes Inc. (BHI): Maintain Buy rating - Goldman Sachs

News

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.

Implications

(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.

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From: Dennis Roth7/30/2007 5:38:51 PM
   of 18
 
Cost efficiencies to help drive margins - still Buy - Goldman Sachs - July 30, 2007

What's changed

Reported EPS of $1.09 came in within the pre-announced range of $1.07-$1.09 and $0.01 above our estimate of $1.08. We fine tuned our 2007 EPS estimates by $0.01 to $4.78 from $4.77, due to 2Q07 outperformance relative to our estimate. Our 2008/2009 EPS estimates are unchanged. Management reiterated guidance of 19%-21% international revenue growth for 2007.

Implications

We reiterate our Buy rating for Baker Hughes shares. Following the recent sell-off, we believe that valuation is attractive relative to the peers. We see upside potential in margins, especially at INTEQ, Fluids, Atlas, and Baker Oil Tools. We believe that Fluids division will benefit somewhat from improved mix towards offshore in the coming quarters and INTEQ's margins should improve as the company comes-up the learning curve on new products and overcomes initial high repair and maintenance costs. Furthermore, we are looking forward to higher margin sales in Canada as the rig count improves. We remain concerned about potential pricing erosion in North America in the bits and fluids divisions, but believe that Baker Hughes will be able to adjust its costs structure to minimize the margin impact and preserve share.

Valuation

Baker Hughes is trading at a 2008 EV-DACF/P-E of 10.0x/13.6x, versus 10.4x/12.6x for Halliburton and 14.3x/18.8x for Schlumberger. We fine tuned our 12-month price target to $99 from $100, due to slightly higher net debt.

Key risks

Key risks to our thesis include:
(1) A U.S./Global recession could result in weaker commodity prices and further E&P capex cuts; and
(2) Weakness in natural gas prices could lead to further E&P capex cuts in North America.

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From: Dennis Roth10/29/2007 8:28:24 AM
   of 18
 
In-line 3Q results, but margin guidance disappointing; Still Buy - Goldman Sachs - October 29, 2007

What's changed

We lowered our 2007/2008/2009 EPS for BHI to $4.76, $5.89, and $7.01 from $4.78/$6.15/$7.30, respectively. Our revisions reflect BHI’s more conservative outlook on incremental operating margins (~25%). Our 12-month price target is now $4 lower at $103 (13.0X 2008 EV/DACF).

Implications

There is no change to our Buy-rating on BHI shares, despite the lower-than-expected outlook on incremental margins. Our Buy rating on BHI has been based on aggressive penetration into international markets, improved stability in North America, and regaining of domestic market share. These investment themes have not changed, however the expected EPS benefits associated with them appear to be pushed out further than we expected. Valuation is still inexpensive, and we continue to recommend BHI, although we rank it behind Buy-rated WFT, DO, and NOV. Key takeaways include:
(1) Incremental margin improvement will be tempered by flat drilling activity in North America and a more challenging pricing environment, project startups, and additional international investment.
(2) BHI is “chasing” $10.5 billion of projects globally, with Statoil ($2 bn), Manifa ($1 bn) & Angola’s Block 31 ($1 bn) bid winner announcements expected shortly.
(3) BHI beat our estimates by 4% in North America and 7% in Latin America, but missed by 3% in Europe/CIS (delays in UK, lower Nigeria activity).

Valuation

BHI is trading at 2008 EV-DACF/P-E of 11.3x/15.3x versus SLB at 14.9x/19.2x and HAL at 10.9x/14.6x.

Key risks

Key risks include capacity additions, a sustained decline in commodity prices, and the broader stock market indices.

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To: Dennis Roth who wrote (14)1/31/2008 9:16:56 AM
From: Dennis Roth
   of 18
 
Baker Hughes Inc. (BHI): Growth, execution challenges remain - maintain Neutral rating - Goldman Sachs - 01/30/08

What's changed


We lowered our 2008 EPS estimate for BHI by 6% to $5.30. Our new estimate includes lower North American revenue growth assumptions caused by pricing pressures, as well as a reduction to our international growth forecasts due to BHI’s more conservative approach to expansion and acquisitions. We also lowered our 12-month, P/E-based price target to $77 from $85, and remain Neutral-rated on the stock. Going forward, the upside catalyst to the shares would be awards of major international projects such as Manifa or Block 31 (Angola), although there is no clarity on timing or BHI’s competitive position at this time. We have also lowered our 2009-2010 EPS estimates by 11% and 9% to $6.05 and $6.67.

Implications


BHI clearly provided the most cautious outlook for 2008 among the group.

There were two key takeaways that have a broader impact on the sector.
(1) The company was considerably more cautious on pricing in North America, citing weakness across several product lines, including fluids, logging, and directional drilling. Beyond pressure pumping, peers have only acknowledged marginal price erosion in various sub-segments, like cased-hole wireline. We believe more widespread price weakness could follow, which would also affect sector-wide margins.
(2) BHI attributed its slower international growth outlook to more conservative business practices stemming from its Deferred Prosecution Agreement. We note that other services companies have received inquiries from the DOJ for possible misconduct, and this may become more of an issue for the sector.

Valuation


BHI is trading at 2008 P-E/EV-DACF of 12.7X/9.1X versus Schlumberger at 15.8X/12.0X, Halliburton at 11.8X/9.2X and Weatherford at 14.7X/10.4X.

Key risks

Weaker-than-expected global economic growth or lower-than-expected oil company spending internationally.

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From: Fredman2/5/2008 12:59:26 AM
   of 18
 
I'm still trying to decide if I should buy more BHI, or GRP.

Thoughts ?

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To: Dennis Roth who wrote (15)4/23/2008 8:29:52 AM
From: Dennis Roth
   of 18
 
Baker Hughes Inc. (BHI): Growth strategy still unclear - maintain Neutral rating - Goldman Sachs - April 23, 2008

What's changed

Baker Hughes reported 1Q2008 EPS of $1.21, which was $0.02 above our estimate and $0.01 above the Street estimate. The earnings beat was due to below-the-line items as a lower tax rate and lower share count contributed $0.04 and $0.02 to EPS. This more than offset 3% of lower than expected operating income due to lower margins in the Completions & Production segment associated with the decline in export sales. We made modest adjustments to our model, including changes to our Drilling and Evaluation and Completion and Production forecasts. Our 2008-2010 EPS estimates have changed by 1%, 1%, and 2%.

Implications

There is no change to our Neutral rating on BHI. We expected BHI’s growth to lag peers this quarter and it did just that - with North America revenue growth of 8% below peer growth of 10% and international growth of 8% below peer growth of 25%. We were hoping for more clarity on BHI’s strategy to reaccelerate revenue growth and close the gap on competitors, but we did not get that on the call. Without that, we think it will be hard for the stock to outperform.

Key takeaways from the call include:
(1) Pricing pressures appear less severe than last quarter, with some pockets of strength in Centrilift and Petrolite.
(2) Margins are likely to remain flattish for the remainder of the year - at a level lower than we originally expected, mainly due to rising costs.
(3) Revenue growth should gradually improve throughout the rest of the year, driven by Latin America, Russia, China and India.

Valuation

BHI is trading at 2009E P/E of 13.1X versus SLB at 17.6X and HAL at 13.5X. Our 12-month price target of $79 (12.8x 2009E EPS) is unchanged.

Key risks

Key risks include a sustained decline in commodity prices and the broader stock market indices.

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From: JakeStraw8/31/2009 8:20:32 AM
   of 18
 
Baker Hughes to purchase BJ Services in cash-and-stock deal valued at $5.5 billion
Monday August 31, 2009, 7:32 am EDT
finance.yahoo.com

"It will better position us to drive international growth and to compete for the growing large integrated projects by incorporating pressure pumping into our product offering," he added. Integrated oil companies are active in all phases of the business including production, refining, transportation and marketing.

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