Baker Hughes Inc. warned Friday that the significant drop-off in Canadian drilling this year compared with a year ago will hurt its quarterly earnings.

“The sequential decline in the second quarter of 2007 compared to the first quarter of 2007 primarily results from significant deterioration of activity and profitability in Canada — particularly in the drilling and evaluation segment,” BHI stated in an interim report. Quarterly earnings are expected to be $1.07-1.09/share, about 10 cents below Wall Street’s forecast.

On the news, BHI’s share price fell more than $5, down 5.76% to $84/share. BHI is the third-largest oilfield services firm by market capitalization after Schlumberger Ltd. and Halliburton. Both Schlumberger and Halliburton have extensive international operations.

Canadian and U.S. operations account for about 43% of BHI’s earnings. Revenue growth outside of North America was consistent with BHI’s guidance.

According to BHI’s data for the week ending Friday, the number of rigs searching for oil and gas in Canada stood at 360, compared with 571 for the same period of 2006. Canadian drilling fell to an eight-year low in April with only 81 rigs in service. In the United States, the rig count rose to 1,791 for the week, up from 1,752 a week earlier and ahead of 1,668 for the same period of 2006.

Lower natural gas prices and higher service costs began to drag down the pace of Canadian exploration toward the end of 2006, and that trend appeared to continue through the first half of this year (see Daily GPI, June 22; May 29). Calgary-based Compton Petroleum Corp. acknowledged a poor start in 2007, but on Wednesday it increased its drilling plans based on supply-and-demand fundamentals that it said indicate “longer-term strengthening of natural gas prices” through the rest of the year (see Daily GPI, July 13).

Analysts with Raymond James & Associates Inc. said in a recent monthly report that “Canada remains extremely soft right now between spring break-up and lower relative natural gas prices due to the regional differential.” However, “under our outlook of strengthening natural gas prices heading into 2008, we suspect activity will begin to improve in Canada in the 4Q, concurrent with the start up of the winter drilling season.”

In reviewing BHI’s data, Collin Gerry, a Raymond James oilfield services analyst, said oilfield services companies with strong international businesses should be relatively safe from the effects of Canada’s drop in drilling, but, “everybody underestimated how strong the effects of Canada would be.”

In a research note, analyst Dan Pickering of Pickering Energy Partners wrote, “Our guess is that the longest rally in the history of this group is probably done.”

BHI will release its quarterly results July 27.

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