Morningstar | BHGE Updated Forecasts and Estimates from 12 Apr 2019
Baker Hughes had an excellent fourth quarter. Revenue increased 11% sequentially and adjusted operating margin increased from 6.7% to 8%, the highest posting on a pro forma combined company basis since mid-2015 (when the turbomachinery business was benefiting from the prior LNG investment cycle). The bulk of the sequential improvement, especially on the bottom line, was driven by the turbomachinery and process solutions, or TPS, segment. Our fair value estimate and no-moat rating are unchanged, for now.The TPS segment had a windfall quarter, with a 28% sequential increase in revenue and adjusted operating margin improving to 14.4% from 9.5% previously. The sequential top-line increase was driven by both equipment and services, but crucially higher-margin services revenue reached its highest level in at least two years, driving the strong bottom-line performance.
The oilfield-services segment was a mixed bag, as revenue improved 2% sequentially but adjusted operating margin slipped to 7.3% from 7.7% previously. The bottom-line weakness was due to lower completion sales and pricing pressure in North America (due to the slowdown in U.S. shale completions activity) as well as start-up costs for international projects. Still, compared with peers (see Schlumberger and Halliburton), Baker Hughes' oilfield-services segment had a good quarter, to a great degree because it no longer has a presence in U.S. shale pressure pumping.
Management expects that the first quarter of 2019 is unlikely to look as good as the fourth quarter of 2018, due to typical seasonal declines in oilfield services as well as the nonrepetition of the strong TPS work. Still, the overall outlook for 2019 is strong, as indicated by strong order flow in 2018.
Baker Hughes is an energy technology company. The company's segments are: Oilfield Services, which provides products and services for onshore and offshore operations ranging from drilling, evaluation, completion, production, and intervention; Oilfield Equipment, which provides products and services for the subsea, offshore surface and onshore operating environments; Turbomachinery and Processing Solutions, which provides equipment and related services for mechanical-drive, compression and power-generation applications; and Digital Solutions, which includes condition monitoring, industrial controls, non-destructive technologies, measurement, sensing, and pipeline solutions.
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