Surprisingly Strong North America Results at Baker Hughes Inc

After constantly hearing about the severe weather disruptions for the energy sector in North America, Baker Hughes reported one of the strongest quarters in recent history. Even more surprising to investors not following the oil services industry is that the stock surged to highs not seen since the summer of 2011 on the bullish news.

Baker Hughes is a global leader in supplying oilfield services, products, technology, and systems to the oil and natural gas industry. Though the company has a substantial global business approaching $24 billion, it pales in comparison to Schlumberger , which reported first-quarter earnings on the same day. Schlumberger has a massive oilfield services business expected to reach annual sales of nearly $50 billion this year.

Though the market wasn't as impressed with the quarterly results from Schlumberger, the North American segment for both oilfield services giants was impressive.

Margin surge
During the first quarter, Baker Hughes generated a 200 basis point increase in operating margins in North America during what was supposedly a weak operating environment. Not to be outdone, the company saw the international operating profit gain 6% sequentially. The distinguishing number, though, was a sequential increase in North America revenue. The severe weather didn't prevent the oil services firm from generating an increase in North American revenue of $32 million in what otherwise could've been a weak quarter. All other regions saw small declines in revenue from the fourth quarter.

The company suggests that the demand for both innovative and integrated products and services is very high. Combining this demand with operating efficiencies drove very profitable growth.

The margin improvement was so substantial for Baker Hughes that it saw overall revenue decline sequentially, but adjusted income surged to $369 million from only $277 million in the previous quarter. The numbers led to an impressive 29% increase in earnings per share over last year. The company generated earnings of $0.84 versus analyst estimates of only $0.78.

Schlumberger, in its own first quarter report, suggested that pricing was stable, but customer demand for new technology at premium pricing contributed to margin expansion. The oilfield services giant saw earnings surge 23% year over year, but it actually had a 11% sequential decline caused by the 6% decline in revenue.

Share repurchases
Despite weather that affected operations in North America, China, and Russia, the oil services group was actively buying back shares at multi-year highs.

Baker Hughes spent $200 million to buy 3.4 million shares, leaving $1.45 billion left under their buyback plan. With a market value of nearly $30 billion, the remaining buyback authorization amounts to roughly 5% of the outstanding stock.

Schlumberger repurchased 9.96 million shares of its common stock at an average price of over $90 for a total purchase price of $899 million. At a market cap of $130 billion, the purchase total isn't a large amount of capital returned to shareholders, though it does add up nicely with a 1.6% dividend yield.

Bottom line
The surprisingly strong results during a difficult weather environment bode well for the oilfield services stocks. The industry as a whole trades at relatively attractive earnings multiples with Baker Hughes trading at only 13.4x 2015 estimates. The valuation is very attractive considering the earnings growth and high valuations of other sectors selling off recently -- a prime example that pockets of the market still offer compelling values.

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