Baker Hughes Inc. warned on Friday a significant deterioration of activity and profitability in Canada would hurt its second-quarter profit, knocking down stocks in several oil service peers.

Weak prices for gas in Western Canada have weighed on the oil service sector over the past year as producers halted production and scaled back exploration activities.

But the Baker Hughes announcement, which sent its shares down more than 5 percent, surprised Pierre Connor, analyst with Capital One SouthCoast in New Orleans, who expected the Houston-based company's oil rig business to protect it from the weaker gas environment.

It's obviously worse than expected, he added.

The number of rigs searching for oil and gas in Canada was 286, according to Baker Hughes latest weekly data, up from the previous week but about half the 560 mark a year ago.

The declines in Baker Hughes led the weakness in the Philadelphia Oil Service Index, which slipped 0.7 percent in early trading.

BJ Services, Weatherford International, Grant Prideco, Smith International and Tenaris SA were down between 0.8 percent to 4 percent after the Baker Hughes news, although the two sector leaders, Schlumberger Ltd. and Halliburton Co. held moderate gains.

Baker Hughes said the weakness was felt particularly in the drilling and evaluation segment in Canada, although its international operations remained on target.

Things almost everywhere else in the world are very solid, said Jeffries & Co. analyst Stephen Gengaro. We're not really overly worried about this ... I think the Baker announcement gets it washed out in the stocks pretty quickly.

The oilfield services company expects to report second-quarter earnings of $1.07 to $1.09 a share, compared with the $1.17 a share it reported in the first quarter.

Analysts on average expected the company to earn $1.18 a share according to Reuters Estimates.

An increase in Baker Hughes' effective tax rate to between 34 to 35 percent is expected to reduce the company's earnings by about 3 cents per share.

The company is scheduled to release its definitive results on July 27.

Baker Hughes shares were down 5.5 percent to $84.20 per share on the New York Stock Exchange.

(Reporting by Matt Daily and Michael Erman in New York and Ankur Relia in Bangalore)

Canada Energy