Baker Hughes (BHI) saw international operations lag estimates for the third quarter as deterioration in the geographic and product mix of its services hit margins by 125 basis points.

The oilfield services provider expects international margins to recover to 15% in the current quarter. The company's performance fell short of our estimates, which were based on the assumption that operations would benefit from the acquisition of BJ Services last year.

Operations in North America, however, saw robust growth -- as was the case for larger operators Halliburton (HAL) and Schlumberger (SLB).

We have revised our price estimate for Baker Hughes from $89 to near $72, still a 30% premium over its current market price. The new estimate reflects lower near-term margins, lower revenue per rig and the company's higher debt balance.

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North American operations strong

Baker Hughes posted strong growth in North America as its Canadian rig count grew substantially and U.S. land exploration activity remained robust. Resumption of activity in the Gulf of Mexico also impacted results positively.

The company maintained a positive outlook for the industry despite the heightened volatility in the commodity markets as fears of a global slowdown increased. Baker Hughes pointed out that oil demand was now reaching record levels with strong demand from Asian countries, and that as conventional resources eventually decline they would be replaced by more service-intensive unconventional sources, which bodes well for the oilfield services industry.

International revenue also grew but a decline in margins pulled down the results in these geographies.

Other factors

Baker Hughes' cash position continues to fall. The company held $803 million in cash and equivalents at the end of the third quarter, down from $1.7 billion at the beginning of 2011. The company's total debt outstanding increased further in the third quarter. Net working capital increased in the period, and these changes have been incorporated into our model.

We have also revised our estimates for the growth in rig count in North America and international geographies. Expected growth in margins for 2011 and 2012 has been toned down in our forecasts, which led to the lower price estimate for the stock.