Poor market conditions are forecast to permeate every segment of Baker Hughes Inc.'s business through the rest of the year, with the North American rig count "relatively unchanged," management said Tuesday.
The Houston oilfield services (OFS) company in its second quarter results said it is forecasting "unfavorable market conditions...across all segments" at least until 2016. The company, the No. 3 OFS operator in the world, is merging with Halliburton Co., a tie-up expected to be completed by year's end (see Daily GPI, July 13). Halliburton issued its latest results on Monday (see Shale Daily, July 20).
"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," Baker management said. Worldwide rig counts also are set to slow.
"Looking ahead to the second half of 2015, we expect these unfavorable market dynamics to persist," said CEO Martin Craighead. "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."
Near-term market conditions remain challenging, but "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," he said. "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."
Total revenues during the second quarter, which hit $4 billion, fell by one-third year/year. Revenue from North America, which accounted for almost 38% of the total, declined 47% to $1.50 billion.
The decline in North American revenue was attributed mostly 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." However, in the Gulf of Mexico, deepwater operations "included a favorable mix of completion activity."
Adjusted operating profit margin in North America was minus 8.5%, versus 12% in 2Q2014.
"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" of 2009.
"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," Craighead said. "These actions have resulted in decremental margins of 35% compared to the prior year, a significant improvement from the prior industry downturn."
Focusing on revenue growth in markets that should be "more resilient in this lower commodity environment" actually led to "significant drilling and production chemical wins" in areas that include the Gulf of Mexico, he said.
Overall, the operator lost $188 million (minus 43 cents/share) in 2Q2015, versus profits of $353 million (80 cents) a year earlier. Excluding one-time impacts, net losses totaled $62 million (minus 14 cents/share), which included $76 million in restructuring charges, $83 million for merger-related costs and $23 million for inventory adjustments.
Free cash flow in 2Q2015 totaled $413 million, versus $72 million a year ago. Excluding one-time charges, free cash flow would have been $608 million. Capital expenditures for the second quarter totaled $258 million, compared with $424 million in 2Q2014.
At the end of June, Baker had $1.97 billion in cash and cash equivalents, while long-term debt was $3.90 billion, representing a debt-to-capitalization ratio of 18%. The company's capital expenditures were $258.0 million in the quarter.
OPEC's decision to keep producing through the oil price collapse is having an impact on drilling rigs in certain areas. For June 2015, rigs in the Middle East were down just 5.6% Y/Y, vs. a whopping 52.9% in North America. Non-Middle Eastern OPEC nations likely helped prevent the year-over-year rig declines in Africa and Latin America from being lower than they might otherwise have been.