UPDATE 4-U.S. natgas glut weighs down Baker Hughes profits

Wed Jan 23, 2013 11:24am EST

* Fourth-quarter profit falls 36 percent

* Plans to cut capex by 30 percent for 2013

* Adjusted Q4 EPS 62 cents vs 61 cents expected

* Shares up 0.5 pct

By Braden Reddall

Jan 23 (Reuters) - A glut of North American natural gas is weighing heavily on both drilling activity and pricing power for Baker Hughes Inc, the world's third-largest oilfield services company, which posted a 36 percent drop in quarterly profit on Wednesday.

After service companies spent heavily to gear up for a boom, a surge in natural gas output led to a drop in drilling activity that left North America with 25 percent too much pressure pumping equipment - used in hydraulic fracturing to extract oil and gas from shale rock.

Baker Hughes Chief Executive Martin Craighead said the downward drag of pressure pumping masked strong performances in other parts of the business.

"But these headwinds on pricing, it's not over yet and it's going to be a drag on the overall North America margin for all of '13, easily," he told analysts on a conference call.

Larger rival Halliburton Co will reveal how it fared when it posts fourth-quarter results on Friday. Sector leader Schlumberger managed to offset the U.S. onshore decline with a strong performance in the Gulf of Mexico.

Craighead said the surplus capacity translated into 125 pressure pumping fleets across the North American sector that are now idle or underutilized, and that another 300 drilling rigs would need to go back to work eliminate that overhang.

Yet Baker Hughes, which compiles a benchmark rig count for the industry, predicted a rise in the U.S. drilling rig count to 1,880 by the end of 2013 - up only 125 from current levels.

Craighead said rig efficiency would improve, with the number of wells sunk per rig growing again this year after a rise in 2012. This has been driven by better understanding of the reservoirs as well as newer drilling equipment.

International rig activity would rise by 7 percent in 2013, even if the addition of Iraq's rigs to the mix was excluded, Baker Hughes said.

When asked about first-quarter earnings, Chief Financial Officer Peter Ragauss said the "big question mark" was North American pressure pumping and whether utilization rates rose.

"And I'm not going to call that for you," he added.

The company plans to cut capital expenditure by 30 percent for 2013 from its 2012 level of $2.87 billion. The share of capital devoted to North America would drop to about a third this year, down from half in 2012.

Scott Gruber, analyst at Bernstein Research, believes North American activity will keep climbing out of its trough, while more work offshore and in the Middle East would boost international revenue.

"These trends should propel renewed earnings growth during 2013," Gruber said in a note to investors. "As a result, we remain positive on Baker Hughes, although Schlumberger and Halliburton remain preferred, given greater confidence in operational performance."

Baker has suffered most from its U.S. land-drilling exposure. Its shares are down 9 percent in the past year, compared with increases of about 5 percent for its two bigger competitors.

The number of U.S. rigs drilling for oil and natural gas liquids fell to a 10-month low, at 1,316, in the week ended Jan. 18, while the gas-directed count hovers just above the 13-1/2-year low of 413 posted 10 weeks ago, Baker Hughes data show.

Baker said its net income fell to $211 million, or 48 cents per share, for the fourth quarter, from $331 million, or 76 cents per share, a year earlier. Revenue fell slightly to $5.22 billion, with nearly half of that coming from North America.

The Houston-based company warned last month that fourth-quarter margins and revenue would be below its expectations. The adjusted fourth-quarter profit of 62 cents per share was a penny ahead of the lowered average estimate.

Shares of Baker Hughes rose 21 cents to $45.06 in late-morning trading on the New York Stock Exchange on Wednesday.

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