Baker Hughes Incorporated has announced its results for 2Q16. “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,” said Martin Craighead, Baker Hughes Chairman and Chief Executive Officer.
“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. I am extremely pleased with our progress and, while we have more work ahead of us, the Baker Hughes team is focused on execution and delivering on our commitments to customers and shareholders.”
“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% sequentially despite a 19% 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”.
“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”.
Revenue for the quarter was US$2.4 billion, a decrease of US$262 million, or 10% sequentially. Compared to the same quarter last year, revenue is down US$1.6 billion, or 39%. Revenue for the quarter continued to be impacted by activity declines in the market and increasing pricing pressures.On a GAAP basis, net loss attributable to Baker Hughes for the second quarter was US$911 million, or US$2.08 per diluted share, compared to US$981 million, or US$2.22 per diluted share, in 1Q16. The second quarter includes charges related to goodwill impairment, asset impairments, restructuring, and inventory, almost entirely offset by the merger termination fee paid to the company by Halliburton as a result of the termination of the Merger Agreement on 30 April 2016.
Adjusted net loss (a non-GAAP measure) for the quarter was US$392 million, or US$0.90 per diluted share. Adjusted net loss excludes adjustments totalling US$519 million after tax (US$1.18 per diluted share), which are net of the US$3.5 billion merger termination fee.
Adjusted EBITDA (a non-GAAP measure) was US$150 million for the quarter, a decline of US$258 million, or 239% sequentially, and down US$609 million, or 133% compared to the 2Q15. In addition to the decline from activity and pricing, adjusted EBITDA was negatively impacted by US$166 million of provisions for doubtful accounts primarily in Ecuador—a US$119 million sequential increase—and US$45 million related to valuation allowances on indirect taxes.
Cash flows provided by operating activities were US$3.6 billion for the quarter, an increase of US$3.7 billion sequentially and US$3 billion year over year. Free cash flow (a non-GAAP measure) for the quarter was US$3.6 billion, an increase of US$3.7 billion sequentially and US$3.2 billion year over year. These increases are driven primarily by Halliburton’s payment of the US$3.5 billion termination fee.
For the quarter, capital expenditures were US$70 million, a decrease of US$16 million, or 19% sequentially, and down US$188 million, or 73% compared to the 2Q15. The reduction in capital expenditures is attributable to reduced activity levels and our continued focus on capital discipline. Depreciation and amortisation expense for the quarter was US$305 million, a decline of US$49 million, or 14% sequentially, and down US$129 million, or 30% compared to the same quarter last year. The decline in depreciation and amortisation expense is primarily driven by asset impairments.
Corporate costs were US$29 million, compared to US$32 million in the prior quarter and US$42 million in 2Q15. The year over year reduction in corporate costs is mainly due to workforce reductions and lower spending.
Income tax expense was US$152 million for the quarter, an effective tax rate of (20%) compared to (59.8%) in 1Q16. As a result of geographic mix of earnings/losses, including the merger termination fee, goodwill impairment, asset impairment and restructuring charges, and other discrete tax items, our tax rate has been, and will continue to be, volatile until the market stabilises.
North America revenue of US$668 million for the quarter decreased 18% sequentially. The decline was driven, primarily, by a steep drop in US onshore activity and the seasonal decline in Canada as the rig count dropped an additional 35% compared to the prior quarter average. Revenue was also impacted by share reductions in onshore pressure pumping driven by efforts to reduce losses related to unsustainable pricing conditions. Although revenue in the region was impacted by price erosion, the company believes there are indications that pricing has reached bottom in many basins.
Operating loss before tax for the second quarter was US$311 million, an US$86 million increase compared to the prior quarter. The increase was primarily driven by the sharp reduction in revenue and US$209 million in inventory adjustments. The increase was partially offset by the reversal of a US$51 million loss on a firm purchase commitment recorded in the prior quarter, and initial savings from the restructuring efforts, including lower depreciation and amortisation from impairments.
Adjusted operating loss before tax (a non-GAAP measure), which excludes the inventory adjustments and the reversal of the loss on the firm purchase commitment, was US$153 million for the second quarter, a US$21 million improvement compared to the prior quarter.
Europe/Africa/Russia Caspian revenue of US$581 million for the quarter decreased 5% sequentially, primarily as a result of reduced activity and price deterioration in North Africa, Nigeria, the UK, and Angola, as customers reduced spending on higher cost projects. Conversely, revenue sequentially was favourably impacted by foreign exchange rates, particularly for the Russian Ruble and European currencies, and increased activity in Norway.
Operating loss before tax for the second quarter was US$257 million, an increase of US$238 million compared to the prior quarter. Beyond the impact from activity and pricing, the increase was driven by US$152 million of inventory adjustments, US$38 million of valuation allowances on indirect taxes in Africa, and US$14 million in additional provisions for doubtful accounts.
Adjusted operating loss before tax (a non-GAAP measure), which excludes the inventory adjustments, was US$105 million for the second quarter, an US$86 million increase compared to the prior quarter.
Adapted from press release by Francesca Brindle
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