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The World's Third-Largest Oilfield Services Provider Favoring from Key Actions

March 21, 2014 | About:
Victor Selva

Victor Selva

9 followers

Baker Hughes Incorporated (BHI) is a supplier of oilfield services, products, technology and systems to the oil and natural gas industry. The company provides products and services for drilling and evaluation of oil and natural gas wells; completion and production of oil and natural gas wells; and other businesses, including downstream refining, and process and pipeline services.

Strong Portfolio

Baker Hughes plans to further expand in the international markets. Many large oilfield services firms have seen record quarterly revenues as well as improved profitability from the Gulf. Baker Hughes, has a competitive set of technologies, which allows it to bolster its activity in the deepwater Gulf of Mexico and in the future can be scaled up to other offshore and deepwater markets across the world.

New Product

The company has introduced the AutoTrak Rotary Steerable System, which it was named the "Best Drilling Technology" in 2011 by World Oil. "The AutoTrak Curve system drills more precisely and at a much tighter angle than any other similar service. The tight angle is particularly critical as it enables our customers to intersect a much larger area of the reservoir than was previously possible with rotary steerable systems, resulting in 750-plus feet of additional pay zone," said Art Soucy, Baker Hughes' president of Global Products and Services. The advanced technology saves time which will boost revenues in the near term.

Key Areas

The company has five segments. Four of these segments represent its oilfield operations and their geographic organization: North America; Latin America; Europe/Africa/Russia Caspian; and Middle East/Asia Pacific. The firm is focused on expanding in high-growth different regions such as the Middle East/Asia Pacific, and Europe, Africa, Russia, and the Caspian regions. Iraq and Saudi Arabia are expected to see significant growth.

Analyst Recommendation

The firm is currently Zacks Rank # 3 - Hold, and it also has a longer-term recommendation of “Neutral”. For investors looking for a Zacks Rank # 1 – Strong Buy, Willbros Group Inc. (WG) and Compressco Partners L.P. (GSJK) could be the options.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 25.1x, trading at a premium compared to an average of 16.8x for the industry. To use another metric, its price-to-book ratio of 1.6x indicates a discount versus the industry average of 1.61x and the price-to-sales ratio of 1.2x is below the industry average of 1.35x.

Earnings per share (EPS) increased by 14.3% in the most recent quarter compared to the same quarter a year ago (from $0.49 to $0.56). In the next graph we can see that its evolution and we include the stock price because EPS often lead the stock price movement.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a signal of weakness within the company. Let´s compare the current ratio with the peer group in the next table:

Ticker

CompanyName

ROE (%)

BHI

Baker Hughes

6.19

BAS

Basic EnergyServices, Inc.

-10.41

EXH

Exterran Holdings, Inc.

7.41

UNT

UnitCorporation

8.5

CHOLY

China OilfieldServicesLimited

14.16

As we can see, the firm has a higher ROE than Basic Energy Services Inc. (BAS), but less than the ones showed by Exterran Holdings Inc. (EXH), Unit Corporation (UNT) and China Oilfield Services Limited (CHOLY).

Final Comment

As outlined in this article, the activity in the Gulf will provide a tremendous growth opportunity going forward. New technology will reduce risk and improve efficiency, with a logical impact on Baker´s profitability. Therefore, I feel bullish about this company’s future profitability.

According to Yahoo! Finance, the estimated one-year target share price is $66.19, so if you buy shares at current market price ($61.52), your return from price appreciation would be 7.6%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 15 cents per share each quarter, totalizing $0.6 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1%. So the total expected return for investing in Baker is 8.6%.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Stanley Druckenmiller (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) have invested in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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