Baker Hughes Warns Russia Triggers Sales Erosion, Challenges

(Bloomberg) -- Baker Hughes Co. warned of a continuing erosion of sales in Russia this year as the world’s No. 2 oilfield contractor struggles to move people and equipment into one of the world’s biggest oil-producing nations.

During the call about the first quarter earnings, the company executives offered a rare glimpse of the challenges that a Western energy company faces as it continues to work in Russia after President Vladimir Putin launched an invasion on Ukraine seven weeks ago. While the Houston company announced last month an end to future investment in the country, it didn’t follow Halliburton Co., the only major oilfield service provider to begin a wind down of current work in Russia. Shares of Baker Hughes fell as much as 10.7% for its biggest intraday drop in more than two years. 

“Sanctions from the U.S., U.K., and EU continue to evolve and are evolving and are making ongoing operations increasingly complex and a bit more difficult,” Chief Financial Officer Brian Worrell said on the call with analysts. “We do have inventory in the country, but, given the sanctions, are unable to import key technologies for some of the services.” 

Baker Hughes reported earnings that missed analysts’ expectations as it suffers from supply chain snarls and uncertainty in Russia, a country that represented about 4% of the company’s total revenue during the first three months of the year.

“The concerns are that we went through a weak quarter, that supply chain and inflationary issues are going to be with us for a bit longer and that the outlook for 2022, while demand hasn’t really changed, the cost side of the equation and the ability to execute has somewhat changed,” said James West, an analyst at Evercore ISI who rates the shares the equivalent of a buy and owns none, said in a phone interview.

Service companies, which do the fracking and drilling onshore and offshore, are coming back from a two year stretch that included cratering energy prices and the pandemic-driven slump in worldwide economic activity. While their clients have been raking in record free cash flow, the contractors who provide the manpower to find oil and drill the wells have lagged behind financially as they navigate supply chain snarls and attempt to pass on cost inflation in the form of higher service prices.

Baker Hughes posted a surprise loss of $8 million in its oilfield equipment business, while analysts were expecting $12.6 million in operating income, according to Bloomberg data. It did however report better-than-expected orders of $739 million for new gear in the division.

It also said the war in Ukraine will accelerate the efforts toward diversifying energy sources and transition away from the most polluting fuels. It said Europe’s search for energy suppliers other than Russia sped up discussion about new LNG projects. Baker Hughes supplies turbines used by liquefied natural gas producers.

The company reported earnings of 15 cents a share, excluding certain items, while analysts expected 19 cents. Smaller rival Halliburton reported results a day earlier that met analysts’ expectations while boosting its estimate for client spending in North America this year.

“All things considered, not a horrible outcome in a challenging supply chain environment,” analysts at Tudor Pickering Holt & Co. wrote Wednesday in a note to investors. “But not one that’s likely to turn heads either.”

Baker Hughes said some of its Middle East and North America clients are talking about increasing their spending plans in response to the volatile supplies of crude from Russia.

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