Baker Hughes Net Rises; Says Outlook `Less Certain'

By Jim Polson

Oct. 22 (Bloomberg) -- Baker Hughes Inc., the world's third-largest oilfield-services provider, reported a 10 percent increase in third-quarter profit and cautioned that its outlook has become ``less certain'' as energy prices slump.

Net income climbed to $428.9 million, or $1.39 a share, from $389.1 million, or $1.22, a year earlier, the Houston-based company said today in a statement. Profit was $1.29 a share excluding a tax gain, missing by 7 cents the average of 25 analyst estimates compiled by Bloomberg.

Oil futures on the New York Mercantile Exchange, which reached a record $147.27 a barrel in July, have since sunk about 54 percent. Chief Executive Officer Chad Deaton said in the statement that customers will factor in lower commodity prices and slower demand growth in their budgets and a lack of credit could affect spending.

``They have a great product suite and great services for the kind of environment we're going to see, but their track record for meeting expectations is not that great,'' said Waqar Syed, an analyst in Denver for Tristone Capital Inc. who rates the shares at ``outperform'' and owns none. ``With these results from the quarter, that whole idea will be brought into question again.''

Baker Hughes fell 15 percent, or $5.98, to $32.97 at 9:42 a.m. in New York Stock Exchange composite trading. That extended its decline this year to 59 percent.

Hurricane Impact

Production and shipping disruptions caused by Atlantic hurricanes cut earnings by 11 cents a share for the quarter, Baker Hughes said.

``Baker Hughes has a disproportionate amount of its operations in the Gulf of Mexico,'' said David Rewcastle, an analyst at Argus Research in Stamford, Connecticut, who rates the shares a buy and owns none. ``They usually get hit more than anybody else.''

Pretax profit at the company's drilling and evaluation unit fell 2.9 percent to $346.6 million. Earnings increased 12 percent to $322.8 million at the completion and production division.

North American pretax profit rose 1.9 percent to $316.1 million and gained 4.5 percent to $51.1 million in Latin America. Europe, Africa, Russia and the Caspian Sea region jumped 18 percent to $201.6 million, while pretax profit from the Middle East, Asia and the Pacific declined 12 percent to $100.6 million.

Third-quarter revenue rose 12 percent to $3.01 billion. World rig count was up 12 percent to 3,557 as of Sept. 30, from 3,166 a year earlier, according to Baker Hughes's monthly census.

Gas Drilling

The company's industry survey found that gas drilling gained 8 percent from a year ago, and demand to drill more complex horizontal wells soared 45 percent.

Exploration and production spending in the U.S. and Canada will fall 15 percent next year given the drop in natural-gas prices and tighter credit, leading to slower profit growth for Baker Hughes, James Crandell, an analyst at Barclays Capital, said in a report this month.

Revenue in the current quarter from operations outside North America will rise as much as 15 percent from a year earlier, Banker Hughes said. Spending on production outside North America will gain 20 percent in 2009 because oil at about $70 a barrel is enough to spur new drilling, Crandell said.

Baker Hughes affirmed a previous forecast for 2008 capital spending of $1.3 billion, up from $1.13 billion last year.

Rig Decline

The number of U.S. rigs has fallen by 55 from a peak of 2,031 at the end of August as gas drillers slow work, Deaton said today on a conference call with analysts. U.S. rig count by year-end may be 200 to 400 below the August peak, he said.

``A decline of 200 rigs would put us back to where we were in the first quarter,'' Deaton said. ``The next 200 will hurt a little more.''

``The global oil market remains tight by historical standards despite the sharp drop in oil prices, and the energy industry remains challenged to develop adequate oil and natural gas supplies to offset current declines in existing fields,'' Deaton said.

In the U.S., 78 percent of the rigs at work were searching for gas, a regional commodity because of transportation constraints. Crude oil, shipped by tanker, is a global commodity. U.S. natural-gas prices touched a 30-month closing high of $13.577 per million British thermal units on July 3 before dropping as much as 52 percent.

Schlumberger, Halliburton

Schlumberger Ltd., the world's largest oilfield-services provider, said Oct. 17 that third-quarter net gained 13 percent to $1.53 billion, or $1.25 a share. Halliburton Co., the second biggest, reported a loss of $21 million for the quarter on financing costs and lost revenue from hurricane damage. Both companies are based in Houston.

Baker Hughes said it repurchased 538,900 shares during the quarter for $39 million, or an average $71.26 a share.

Refinancing of $525 million of debt due in next year's first quarter and acquisitions of competitors or technology at depressed prices will take priority over further repurchases, Chief Financial Officer Peter Ragauss said on the call.

Debt increased by $9 million to $1.63 billion during the quarter, he said. The company had $2.1 billion in cash and available credit as of June 30, including $505 million of short- term corporate debt known as commercial paper.

``We have had no problem selling commercial paper to meet our daily needs through the credit crisis,'' Ragauss said.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.