Baker Hughes (BHI): What's In Store This Earnings Season?

Leading oilfield services company, Baker Hughes Inc. (NYSE:BHI) is set to report second-quarter 2016 results on Jul 28, before the opening bell.

In the last reported quarter, the company incurred loss from continuing operations of 44 cents a share, wider than the Zacks Consensus Estimate of a loss of 33 cents. The results were hurt by the steep fall in oil price which limited demand for rigs. Notably, the company outpaced the Zacks Consensus Estimate in two of the last four quarters.

BAKER-HUGHES Price and EPS Surprise

BAKER-HUGHES Price and EPS Surprise | BAKER-HUGHES Quote

Let’s find out how Baker Hughes might perform this quarter after combating some serious challenges in the three-month period ended Jun 30.

Factors at Play

It is common knowledge that the overall operation in the oilfield services space is positively correlated to oil price. This is because lower the price of the commodity, lesser will be the incentive for upstream players to explore and drill more wells. This, in turn, means weaker demand for oil field services and hence, less income for the companies providing these services.

Despite the recent recovery in oil prices, the commodity is still trading under $50 a barrel – far below the breakeven price for many energy companies. As a result, most of the drillers have decided to significantly cut their 2016 capital spending from the 2015 level. Hence, Baker Hughes, which supports drilling players in setting up oil wells, is expected to earn less in 2016 and the second quarter is unlikely to be an exception.

Overall, Baker Hughes’ activities during the quarter proved inadequate to win analysts’ confidence. This is evident from the Zacks Consensus Estimate widening to a loss of 60 cents a share from a loss of 36 cents over the last 90 days.

However, to offset the negatives, the company has been proactive in cost reduction and working capital management. It has also been strategically targeting revenue opportunities in the to-be-reported quarter to continue increasing profitability, generate positive cash flow and maintain a strong balance sheet.

Earnings Whispers

Our proven model does not conclusively shows that Baker Hughes beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is the case here as you will see below.

Zacks ESP: Baker Hughes has an ESP of -5.00% for the second quarter. This is because the Most Accurate estimate of 63 cents loss is wider than the Zacks Consensus Estimate of 60 cents loss per share.

Zacks Rank: Baker Hughes currently carries a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the energy sector that investors may consider, as our model shows that they have the right combination of elements to beat estimates this quarter:

Anadarko Petroleum Corporation (NYSE:APC) has an Earnings ESP of +1.30% and a Zacks Rank #2. The company is likely to release earnings results on Jul 26.

Legacy Reserves LP (NASDAQ:LGCY) has an Earnings ESP of +31.58% and a Zacks Rank #1. The partnership is expected to release earnings results on Aug 3.

Noble Energy Inc. (NYSE:NBL) has an Earnings ESP of +6.25% and a Zacks Rank #2. The company is expected to release earnings results on Aug 3.