EXECUTIVE SUMMARY
1 COMPANY OVERVIEW
2 FINANCIAL ANALYSIS (2005 – 2009)
2.1 Liquidity Ratios
2.2 Leverage Ratios
2.3 Productivity Ratios
2.4 Profitability Ratios
2.5 Shareholders’ Acceptance
3 PROJECTED FINANCIAL STATEMENTS (2010 – 2012)
3.1 Assumptions
3.2 Future Analysis
4 CONCLUSION
EXECUTIVE SUMMARY
As BHI’s overall picture is frequently compared with two biggest line competitors
including industry-leader Schlumberger (NYSE: SLB) and No.2 Halliburton (NYSE:
HAL) in the same energy markets, this paper will present an overview of their past
performance by key ratios analysis based on financial statements collected in five-year
period and then produce a sales forecast in line with others accordingly to weigh up its
situation in the foreseeable future.
Aimed at ‘increasing market share and achieving long-term profitable growth’ as
communicated in BHI’s Annual Report (2009), BHI still have more rooms to compete
actively when the demand for energy is expected to get better.
1 COMPANY OVERVIEW
Baker Hughes Incorporated (NYSE: BHI), specializing in Oil/Gas Equipment & Services
sector since 1986, has been considered as the world’s third-largest, most diverse oilfield
services companies with significant achievements in related areas of expertise. It is
remarked that 2008 was a successful year when BHI achieved record revenues and gross
profits though warning signs were spotted from the third quarter. It can be seen that BHI’s
strengths have been continuously improved by striving for ongoing investment in
technology, people and industry as well as new capabilities during the year to be able to
face up to the uncertain outlook for 2009. Still being unavoidable, it seemed that a number
of restructuring and targeted takeover by BHI along with a 19% decrease in revenues due
to the global recession in 2008-2009 period had really a strong impact on the net income
(BHI earned $9.7 billion in revenue and $421 million in net income in 2009). This made
BHI try to tone down the market’s growth projections which might affect negatively the
shareholders’ psychology, even this trend obviously influenced all the service providers in
this industry.
2 FINANCIAL ANALYSIS (2005 – 2009)
2.1 Liquidity Ratios
Generally, current assets play an important role in financial analysis. In this case, all of the
three companies have both current and quick ratios above 1,which have an upward trend
even though there has some fluctuation in between. This indicates that they are quite
liquid, since the current assets are able to cover the short-term obligations. Among three
companies, BHI has the highest ratio level (3.86) while SLB the lowest (1.88). In 2008,
BHI’s current debt increased by 1.5 times to $2,511 million compared to 2007, current
liabilities increased 55.2% while current assets increased 14.78%. In 2009, only the
components of fixed assets that grew, both current assets and current liabilities of BHI
decreased 12.88% and 35.76% respectively, leading to a 1.35 times increase in its current
liquidity (3.86). BHI’s quick ratio mimics the movement of its current ratio, where the
ratio increased over time until it considerably decreased in 2008 at 1.88 then surged to
2.43. The high ratio of BHI would indicate their ability to convert current assets into cash
quickly in short-term; however, having too much cash in hand is not necessary always
good because this may reduce the efficiency of capital use in a long run. In terms of cash
conversion ratio, however, BHI shows its weakness against its rival because of the larger
timespan in purchasing inventories and collecting cash and account receivables. Moreover,
the track keeps moving upward through the period (118.69 to 149.12 from 2005 to 2009).
As a whole, BHI in this category has some advantage over its rival due to its ability of
meeting some short-term obligations faster; however, this does not indicate that BHI is in a
safe condition nor its rival in a risky one, since current and quick ratios do not indicate that
whether the companies have a durable competitive advantage. On the other hand, in
consideration of cash conversion cycle, it indicates that BHI should improve its inventories
and accounts collection management to avoid cash being tied up.
2.2 Leverage Ratios
In this category, the three companies are not dependent too much on debt, which can be
observed from both long-term debt and debt-to-equity ratios. However, even though BHI
have the same low level as SLB (0.20 and 0.19 as in debt ratio, 0.25 and 0.23 as in
debt-to-equity respectively), there is a minor upward trend in both of BHI’s ratios, while
SLB’s are moving downward. Meanwhile, HAL range is about 0.31 with some variation in
between. Time-interest-earned is the number of times interest expense is covered by
earnings. In general, the ratios of the three companies are higher than 1 which indicates
their ability of current earnings to pay current interest expense. Yet there is a reduction of
the three ratios from 2005 to 2009, where BHI ratio is wildly fluctuated between 18.69 and
5.66, HAL’s and SLB’s are more stable, moving between the range of 11.19 and 6.66, and
16.08 and 18.80 respectively. BHI’s ratio peaked at 55.23 in 2006 and dropped
dramatically through the period. In 2009, the impact of the global recession caused the
decrease in capital spending, which led to the decline of energy assumption demand. This
had a strong negative impact on BHI’s revenues and its net income (BHI’s net income
dropped to 74.25% in 2009 compared to 2008) paralleling with a slight increase in interest
expenses, which brought about the drop in its current capability of paying interest (4.77
times in decline).
2.3 Productivity Ratios
Upon this category, BHI’s operating performance is generally evaluated as being in a
