Baker Hughes Destroys Four Years Of Gains (BHI)

Lower and lower oil prices are good for the broad economy, but they are bringing pain up and down the oil patch.  Oil services giant Baker Hughes Inc. (NYSE: BHI) is demonstrating this more than any other major player today after earnings.  The company came out with earnings at $1.29 EPS rather than estimates of $1.35.  There are issues here, and the stock is paying the price for it.

What is interesting is that revenues actually rose over 12% from Q3-2007 to $3.01 billion, but that is still short of the $3.09 billion estimate from First Call.  Outside of North America the revenues were up 11% from Q3-2007, but down 1% sequentially.

While the company said that the hurricanes took away $0.11 from its EPS report, it also noted that the results included a $0.10 one-time tax benefit.

It is growing impossible to not recognize that the global energy sector is not facing issues of its own with lower and lower energy prices. While its CEO said that the long-term is favorable, he noted specifically that the near-term outlook has become less certain.  He also noted that he Baker Hughes customer base will factor lower commodity prices and slower global demand growth into their budgets and a lack of credit may impact customer spending.  Another issue is the lack of commercial credit and above-demand natural gas production will yield decreased gas drilling into next year.  The company even noted that international spending outside of North America will be more modest in 2009 over recent years.

What the company is telling you is that it is facing a more realistic and more normalized environment than what we have seen over the last two to three years, and the slowdown is going to create an environment where oil and gas services operations will have to be more competitive in their project bids and more conservative in quoting their day rates per project.  All of this is going to lead to a much less boom town feel inside these companies. 

Baker Hughes stock is down 16% at $32.50 right after noon today.  This was an obvious 52-week low, but it is actually far worse.  At the end of August, this stock was north of $80.00.  After looking through the charts and quote recaps, we have to go back to January of 2004 to find share prices that low.  Oil was trading in the mid-$30's per barrel at that time.  The difference is that oil was rising and had been coming off of multi-year low levels at the time.

At $120 and higher the profits for firms were astronomical.  As prices rose sharply last year the oil patch was cheering with wild profits at $90.00 oil.  But the destruction in demand and the general slowdown affecting growth rates in Asia, Latin America, and Africa is putting immense pressure.  Go ahead and throw in de-leveraging of funds and trading operations to boot.  Oil is down $4.00 today and is challenging the sub-$68.00 mark. 

Hell, if this continues airlines might even be able to run at profitable levels again.