LEADING international oilfield services company Baker Hughes Incorporated second quarter result has received a one-off US$3.5 billion boost from the receipt of a merger termination fee from Halliburton.
The company’s adjusted net loss for the quarter was US$392 million, with the adjusted net loss excluding adjustments totalling $519 million afer-tax which are net of the US$3.5 billion merger termination fee.
In May this year Halliburton Company and Baker Hughes Incorporated announced that the companies have terminated the merger agreement they entered into in November 2014, effective April 30, 2016.
Under the merger agreement conditions Halliburton paid Baker Hughes the termination fee of US$3.5 billion in May.
Baker Hughes’ operating loss before tax for the second quarter was US$142 million, a decline in profitability of US$191 million compared to operating profit before tax of US$49 million in the prior quarter. In addition to the impact of reduced activity and price deterioration, the sequential change was a result of US$125 million of inventory adjustments and US$11 million of additional provisions for doubtful accounts and valuation allowances on indirect taxes.
In announcing the company’s results for the second quarter of 2016, Baker Hughes chairman and CEO, Martin Craighead, said the company’s cost-cutting measures were already paying dividends.
“Our second quarter results reflect the actions we have taken to strengthen our business in light of the difficult conditions our industry faces. During the quarter, we made significant progress in our plan to reduce costs, optimise our capital structure and build on our strength as a product innovator that solves customers’ toughest challenges through leading technology,” Mr Craighead said.
“After we outlined our path forward in early May, we took swift and decisive measures to improve our financial and competitive performance. We simplified our organisational structure to closely align with our commercial strategy and fortified our core operations, while laying the groundwork to develop a broader range of sales channels for our products. We took steps to right-size our asset base and implemented cost reductions that put us on track to achieve our US$500 million annualised savings target by year end.
“We also are well down the path in our plan to optimise our capital structure. During the quarter, we completed debt purchases of US$1 billion, repurchased shares of US$500 million – one-third of our announced buyback programme, and refinanced our US$2.5 billion credit facility.”
Global drilling down
However, the company still took a hit from the decrease in global drilling activity in the quarter.
“In the midst of these structural changes, and while we are facing an extremely tough market environment, I am encouraged to see that our second quarter revenue declined only 10 per cent sequentially despite a 19 per cent drop in the global rig count.
“The decrease in revenue is driven primarily by a continued steep decline in activity and pricing pressure, mainly in the Eastern Hemisphere. Operational losses for the quarter increased sequentially as a result of inventory write-downs, provisions for doubtful accounts – primarily in Ecuador, and valuation allowances on indirect taxes.
Cash flows from operating activities for the quarter were US$3.6 billion, largely as a result of collecting the merger termination fee.”
Mr Craighead said the company was not expecting a turnaround in fortunes over the remainder of 2016.
“In the second half of 2016, excluding the seasonality in Canada, we do not expect activity in North America to meaningfully increase, as our customer community requires a more sustained oil price improvement before committing to any material increase in spending.
“On the other hand, activity internationally is expected to continue to decline in most countries, with a steeper decline in markets with higher lifting costs.
“As a consequence of this outlook, we expect pricing to remain challenging. Margins across all of our segments are expected to improve sequentially as we begin to see the full benefit of the restructuring actions taken this quarter.
“Although we expect the market dynamics to remain challenging near term, the structural changes we implemented this quarter have created a stronger foundation for delivering on our strategy.
“We have made significant progress in a short amount of time, and we remain focused on accelerating our momentum.
“We are more confident than ever that we have the right people, technology, and commercial strategy, and we remain steadfast in our efforts to increase returns through a disciplined approach to capital investment,” Mr Craighead said.
Australian rig activity downBaker Hughes’ Middle East/Asia Pacific revenue declined nine per cent in the quarter to US$651 million, with the company particularly hard hit in Australia, where the rig count dropped 46 per cent sequentially. Revenue also was negatively impacted by unfavorable pricing across the region.