George Soros bought 1,039,662 shares of Baker Hughes at $58.93 per share. Baker Hughes is also in the buy list of many other Gurus over the last six months and this includes John Hussman (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Mariko Gordon (Trades, Portfolio).
This article looks into the key positive factors that make Baker Hughes an attractive long-term investment to consider.
About Baker Hughes
Baker Hughes is a top-tier oilfield service company with a century-long track record. The company delivers solutions that help oil and gas operators make the most of their reservoirs. Baker Hughes supplies oilfield services, products, technology, and systems to the oil and natural gas industry worldwide. The company operates in approximately 80 countries.
The drilling and evaluation group consists of products and services such as drill bits, drilling services, wireline services and drilling and completion fluids.
The completion and production group consists of products and services such as completion systems, wellbore intervention, intelligent production systems, artificial lift, upstream chemicals and pressure pumping.
The Company markets its products and services on a product line basis mainly through its own sales organizations.
Strong Global Diversification
One of the factors I like about Baker Hughes is the fact that the company is well diversified globally. As of 2013, 49% of the company’s revenue came from North America, 17% from Europe, Africa and Russian Caspian, 18% from Middle-East and Asia Pacific, 10% from Latin America and 6% from industrial sales.
Well diversified revenue implies that the company is not entirely dependent on one region or oil & gas producing area for its revenue. The company has shown strong growth in Russia Caspian revenue and I believe that the percentage of revenue from North America will decline with increases in Russia, Asia Pacific and Latin America.
Exposure to these high growth markets will also ensure that steady revenue growth continues for Baker Hughes as it has been the case in the last few years. For 2013, the Middle-East and Asia Pacific region revenue grew by 24% and this is big growth. If this trend continues, Baker Hughes will be strong top-line and bottom-line growth in the years to come.
With the industry being capital intensive in nature, strong fundamentals are important and Baker Hughes has robust fundamentals. The company’s revenue has grown at a CAGR of 23.3% in the last four years from $9.7 billion in 2009 to $22.4 billion in 2013. During the same period, the company’s operating income has increased from $732 million to $1,949 million. In terms of EPS, the company’s diluted EPS has increased from $1.36 in 2009 to $2.47 in 2013. Over the last five years, Baker Hughes has also paid a steady annual dividend of $0.6 per share. I must mention here that the company has increased its quarterly dividend from $0.15 per share to $0.17 per share payable on August 2014.
Things look good even from a balance sheet perspective. As of 2013, the company had a strong cash position of $1.4 billion. The company’s debt as of 2013 was $4.4 billion and the debt to capitalization was 20%. The company has maintained the debt to capitalization at 20% in the last five years and this shows that Baker Hughes has a good financial discipline. A low debt to capitalization also ensures that the company has high financial flexibility for growth.
The company’s operating cash flow is also robust and this makes Baker Hughes a comprehensively strong fundamental company. As of 2013, the company’s operating cash flow was $3.2 billion as compared to $1.8 billion in 2012. With a capital expenditure of $1.7 billion in 2013, the company had a high free cash flow of $1.5 billion for the year. As a result, Baker Hughes was able to pay $1.1 billion of debt during the year.
Continued Stock Repurchase
Baker Hughes is also creating shareholder value through continued share repurchase. For the fourth quarter of 203, the company repurchased shares worth $350 million. For 1Q4, the company repurchased shares worth $200 million and for 2Q14, the company repurchased shares worth $200 million.
The share repurchase is likely to continue as the company generates free cash flow and looks to create value through share repurchase and through increased dividends. After a long time, the company has increased its dividend and this trend is likely to continue.
High Focus on Innovation
Innovation has been the key to Baker Hughes growth and will remain an important growth driver. In 2013, the company launched 129 products, combined products and services to create greater value for customers.
During the year, the company invested $556 million in research and technology and this underscores the point that research & development is a big priority for the company.
FASTrak™ service, ProductionWave™ solution, SHADOW™ series frac plugs and AutoTrak™ Curve rotary steerable system are just some of the innovative products and solutions that have positively impacted the company’s growth. Continued innovation will help Baker Hughes create cost efficient products and services for its clients and increase its market share.
Besides the conventional business growth, 2014 also promises new prospects for the company’s chemical and industrial services business, with opportunities in deep water for upstream chemicals and a growing interest in industrial water treatment and petrochemical processing for downstream chemicals.
Overall, Baker Hughes is well positioned for growth from multiple services and through innovation. The company’s strong performance in emerging markets is likely to continue and should help take the stock higher along with increased shareholder rewards through dividends and share repurchase. Baker Hughes is therefore a good investment to consider for the long-term.