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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.
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.
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.
Weaker-than-expected global economic growth or lower-than-expected oil company spending internationally.
Baker Hughes Inc. (BHI): Growth strategy still unclear - maintain Neutral rating - Goldman Sachs - April 23, 2008
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%.
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.
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 include a sustained decline in commodity prices and the broader stock market indices.
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.