Baker Hughes: Q2 Results – Revenue $4bn Down 33% yoy

Baker Hughes Incorporated (NYSE: BHI) announced today results for the second quarter of 2015.

– Revenue of $4 billion for the quarter, down 33% year-over-year

– GAAP net loss per diluted share of $0.43 for the quarter, includes adjusting items of $0.29 per diluted share

– Free cash flow for the quarter of $413 million, increased $341 million year-over-year

Martin Craighead, Baker Hughes Chairman and Chief Executive Officer, commented, “Revenue of $4 billion for the second quarter declined 33% year-over-year, outperforming the 36% drop in the global rig count, despite incremental headwinds from deteriorating pricing and unfavorable currency changes. Even though the severity of the revenue decline has compressed our margins, we have minimized the impact by aggressively reducing costs and rightsizing our operational footprint. These actions have resulted in decremental margins of 35% compared to the prior year, a significant improvement from the prior industry downturn. Furthermore, earnings for the quarter were impacted by an unfavorable tax rate which resulted primarily from a change in the geographic mix of earnings.

“Our focus on revenue growth in markets we expect to be more resilient in this lower commodity environment has led to significant drilling and production chemical wins in Norway, Saudi Arabia, West Africa, and the Gulf of Mexico. With our efforts on cost reductions and targeted growth, we are well positioned to manage through these difficult conditions while generating positive cash flow, reducing working capital, and improving profitability.

“Looking ahead to the second half of 2015, we expect these unfavorable market dynamics to persist. In North America, we don’t anticipate activity to increase while commodity prices remain depressed as the seasonal activity rebound in Canada will likely be offset by a decline in the U.S. Internationally, rig counts are projected to continue to decline led by many onshore and shallow water markets.

“While near-term market conditions remain challenging, the world’s need for energy will continue to rise and the ability to meet demand will require more complex solutions and advanced technology from oilfield service companies. As such, our strategy of delivering innovative technologies that enable our customers to lower the cost of well construction, optimize well production, and increase ultimate recovery will continue to be an essential differentiator.

“Finally, in regard to the pending merger, I continue to be pleased with the efforts of the teams working on completing regulatory filings and to develop plans for a successful integration.”

2015 Second Quarter Results

Revenue for the current quarter was $4 billion, down 33% compared to the second quarter of 2014.

On a GAAP basis, net loss attributable to Baker Hughes for the second quarter was $188 million or $0.43 per diluted share.

The effective tax rate on net loss for the current quarter was 3.7%, compared to 37.2% on net income for the second quarter of 2014. The decrease is driven by an unfavorable change in the geographic mix of earnings and the loss of certain tax benefits.

Adjusted EBITDA (a non-GAAP measure) for the second quarter of 2015 was $459 million, a decrease of $700 million or 60% compared to the second quarter of 2014.

Adjusted net loss (a non-GAAP measure) for the second quarter of 2015 was $62 million or $0.14 per diluted share. Adjusted net loss for the second quarter excludes $169 million before-tax or $126 million after-tax ($0.29 per diluted share) in adjustments. The adjustments include restructuring charges of $76 million before-tax or $59 million after-tax ($0.13 per diluted share); $83 million before-tax or $60 million after-tax ($0.14 per diluted share) for merger and other related costs; $23 million before-tax or $16 million after-tax ($0.04 per diluted share) for inventory adjustments; and ($13) million before-tax or ($9) million after-tax (($0.02) per diluted share) adjustment relating to a litigation settlement.

Free cash flow for the current quarter was $413 million compared to $72 million for the second quarter of 2014. Free cash flow excluding restructuring payments of $195 million would have been $608 million for the quarter.

For the quarter, capital expenditures were $258 million, compared to $424 million in the second quarter of 2014. Depreciation and amortization expense for the second quarter of 2015 was $434 million, compared to $454 million in the prior year quarter.

Excluding merger-related costs of $40 million in the current quarter, corporate costs were $42 million, compared to $73 million in the second quarter of 2014. The reduction in corporate costs is a result of workforce reductions and lower discretionary spend.

North America

North America revenue for the second quarter was $1.5 billion, a decrease of 47% compared to the second quarter of 2014. The drop in revenue is primarily attributable to the reduction in customer spending, which has resulted in a steep decline in onshore and shallow water activity, and an unfavorable pricing environment. The average U.S. and Canadian rig counts were down 51% for the same comparison period. In the Gulf of Mexico, deepwater operations included a favorable mix of completion activity.

North America adjusted operating profit margin (a non-GAAP measure) was (8.5%) for the second quarter, compared to 12% for the same quarter last year. Margins were negatively impacted by the sharp reduction in activity and an increasingly unfavorable pricing environment. Nevertheless, as a result of actions taken to right size the operational footprint and ongoing cost management efforts, decremental margins at 35% were substantially better than in the most recent downturn.

Latin America

Second quarter revenue for Latin America was $439 million, a decrease of $105 million, or 19%, compared to the second quarter of 2014. Revenue declined largely as result of sharp activity reductions in the Andean area, as reflected in a 43% drop in the rig count, and in Venezuela from decreased operations and unfavorable exchange rates. In Brazil and Mexico, activity reductions were more than offset by offshore share gains.

Adjusted operating profit margin for Latin America in the second quarter was 10.3%, compared to 10.7% for the second quarter of 2014. The impact on margins as result of lower revenue was almost entirely offset by improvements made to the operating cost structure, minimizing year-over-year decremental margins to 12%.

Europe/Africa/Russia Caspian

Revenue was $869 million in Europe/Africa/Russia Caspian, representing a 22% decline compared to the second quarter of 2014. Revenue for the quarter was impacted by approximately $100 million related to the unfavorable change in foreign exchange rates. Activity reductions, unfavorable pricing, and the deconsolidation of a joint venture in North Africa late last year also contributed to the decline. These reductions were slightly offset by share gains in pockets of Africa and Europe.

Adjusted operating profit margins were 6.6% for the second quarter of 2015, compared to 16.5% for the second quarter of 2014. Profitability for the quarter was impacted by approximately $54 million associated with the unfavorable change in foreign exchange rates. Lower activity levels, pricing deterioration, and unfavorable product mix also impacted margins. Workforce reductions and other cost savings were partially offsetting these unfavorable market conditions.

Middle East/Asia Pacific

In the second quarter, revenue was $856 million in Middle East/Asia Pacific, a 22% reduction compared to the second quarter of 2014. The decline in revenue was driven primarily by lower activity throughout Asia Pacific, as reflected in the 12% drop in the rig count, and in Iraq as result of a reduction to our integrated operations, including exiting a large turnkey contract in mid-2014. Revenue was also impacted by unfavorable pricing in certain markets across the region.

Adjusted operating profit margin for the segment was 7%, compared to 14.8% for the second quarter of 2014. The reduction in margins was attributed mainly to lower activity levels and pricing reductions. The current quarter also includes mobilization costs for additional activity in the Middle East. The reduction in margins was slightly offset by improved profitability in Iraq and the benefit of the recent cost-cutting actions.

Industrial Services

Revenue for Industrial Services was $306 million in the second quarter, an 8% decrease compared to the second quarter of 2014. The decrease in revenue was attributed to reduced customer spending across all the industrial businesses, primarily process and pipeline services. Revenue was further impacted by the unfavorable change in foreign exchange rates. These reductions were partially offset by the acquisition of a new specialty pipeline services business in the third quarter of 2014.

Adjusted operating profit margins were 10.5%, compared to 10.2% for the second quarter of 2014. The reduction in profitability associated with lower activity levels was almost entirely offset by savings from recent cost reduction measures.

Outlook

For the remainder of the year, we expect unfavorable market conditions to continue across all segments. North America rig counts are anticipated to remain relatively unchanged. Seasonal increase in activity in Canada is expected to be fully offset by lower activity levels in the U.S. onshore and an unfavorable mix of activity in the Gulf of Mexico. In Latin America, we project the rig count to continue to decline, albeit, at a slower pace. In Europe/Africa/Russia Caspian, the rig count is also expected to decline across most of the region, primarily in onshore and shallow water markets. For Middle East/Asia Pacific, we anticipate the rig count to remain relatively stable as any rig count growth in the Middle East will likely to be offset by rig count declines in Asia Pacific.

Increasing Ultimate Recovery

Baker Hughes continues to provide high-end technologies in Eastern Caspian. Baker Hughes conducted water shut off study for wells in Kazakhstan. The successful results were recognized by the customer and led to services for a multiple array production suite (MAPS) survey of horizontal well aiming to identify water inflow interval and cross flows to perform remedial work using Baker Hughes pressure pumping services. Also in Kazakhstan, Baker Hughes completed the first MAPS run in Chinaryovskoye field that saved the customer 2 days of drilling time. This successful operation is the first step in the production logging campaign aiming to introduce a complex production logging solution with MAPS and the Reservoir Performance Monitor™ platform to the market helping customers have full diagnostic information for their wells including inflow profiles, flow composition, hold ups, and cross flows.