Baker Hughes: An Oil Service Leader With Tailwinds

The company may benefit from increased spending by oil and gas exploration companies

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Sep 09, 2022
Summary
  • Baker Hughes provides a variety of products and services to the oil and gas industry.
  • The company faces short-term challenges such as Russian business and shortage of components.
  • Baker Hughes sells at reasonable valuation levels and has an attractive dividend yield.
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Baker Hughes Co. (

BKR, Financial) provides technologies and services to energy and industrial companies on a global basis. It has historically operated through four segments: Oilfield Services, Oilfield Equipment, Turbomachinery & Process Solutions and Digital Solutions.

According to the company's website, the OFS segment "provides products and services for onshore and offshore operations across the lifecycle of a well, ranging from drilling, evaluation, completion, production, and intervention." It also said the OFE segment designs and manufactures subsea and surface drilling and production systems.

As for the TPS segment, the company notes on its website it provides equipment and services for mechanical-drive, compression and power generation applications across the energy industry.

Finally, Baker Hughes said the DS segment "combines sophisticated hardware technologies with enterprise-class software products and analytics to connect industrial assets, providing customers with the data, safety and security needed to reliably and efficiently improve operations."

However, recently the company consolidated these units into two core businesses: Oilfield Services & Equipment and Industrial & Energy Technology. This reorganization is expected to provide approximately $150 million in cost savings.

Formerly part of General Electric (

GE, Financial), the company changed its name to Baker Hughes in October 2019. The company currently has a market capitalization of $24.3 billion.

Financial review

In July, the company reported second-quarter results that were somewhat mixed. Orders increased 15% year over year but decreased 14% sequentially. Revenue of $5 billion was down 2% year over year but up 4% sequentially. Adjusted operating income increased 13% to $376 million compared to the prior-year period. Adjusted Ebitda of $651 million increased 6% from a year ago.

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The company stated the now common challenges of component shortages and supply chain inflation as well as suspension of Russian operations. Russia produces approximately 14% of the world's oil and gas supply.

Baker Hughes maintains a relatively safe balance sheet with $2.9 billion in cash and $6.6 billion of total debt. With almost $3 billion in estimated Ebitda this year, the company’s leverage ratio is approximately 1.2 times.

Valuation

Consensus analyst earnings per share estimates are $1 for 2022 and $1.72 for 2023, which creates a forward price-earnings ratio of 14. The company currently sells at a forward enterprise value/Ebitda ratio of approximately 7.5 times.

The GuruFocus discounted cash flow calculator creates a value of $30 using next year's earnings per share estimate as the starting point and a 10-year growth rate of 10%.

The company pays an annualized dividend of 72 cents, which currently equates to a dividend yield of 2.85%

Guru trades

Gurus who have purchased Baker Hughes stock recently include

Ray Dalio (Trades, Portfolio) and Ken Fisher (Trades, Portfolio), while gurus who have reduced or sold out of their holdings include Jeremy Grantham (Trades, Portfolio) and Dodge & Cox.

Conclusion

The company offered a bleak but optimistic long-term business forecast by stating:

“As we look to the second half of 2022 and into 2023, the oil markets face an unusual set of circumstances and challenges. On one hand, the demand outlook for the next 12 to 18 months is deteriorating, as inflation erodes consumer purchasing power and central banks aggressively raise interest rates to combat inflation. On the other hand, due to years of underinvestment globally and the potential need to replace Russian barrels, broader supply constraints can realistically keep commodity prices at elevated levels even in a scenario of moderate demand destruction. As a result, we believe the outlook for oil prices remains volatile, but still supportive of strong activity levels as higher spending is required to re-order the global energy map and likely offsets demand destruction in most recessionary scenarios.”

The company should benefit from its recent reorganization into two business groups, which should improve operations. In addition, there appears to a multiyear upstream spending cycle ahead of it, which should provide tailwinds.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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