Baker Hughes Incorporated (BHI) is one of the “Big Four” oil services companies in the world, alongside competitors Schlumberger (SLB), Halliburton (HAL) and Weatherford (WFT).
BHI operates in more than 80 countries, with its business divided into four geographical regions, as well as a separate division for industrial services. North America operations accounted for 49% of 2013 sales, the Middle East and Asia Pacific 18%, Europe/Russia/Africa 17%, Latin America 10% and Industrial Services 6%.
BHI’s oilfield operations are bifurcated into Drilling and Evaluation, and Completion and Production. Drilling and Evaluation products include drill bits, drilling services, wireline services and drilling and fluids while Completion and Production products include completion systems, wellbore intervention, intelligent production systems, artificial lifts, upstream chemicals and pressure pumping.
Industrial Services include downstream chemicals, process and pipeline services.
BHI: Earnings Summary
Baker Hughes’ fourth-quarter 2013 revenue increased 10% to $5.86 billion, helping push profits up 16% to $248 million. In North America, revenue increased 7.2%; that figure was 27% better in the Middle East and up 10% in the Europe/Russia/Africa region. Revenue for full-year 2013 was up 5% to $22.36 billion.
BHI’s first and second quarters saw continued strength, with revenue growth in the high single digits and earnings up a respective 23% and 47% year-over-year. However, while Baker Hughes saw third-quarter revenues climb 8% to $6.25 billion and profits improve nearly 10% to $375 million, BHI missed analyst estimates for both revenues and profits, which took a toll on BHI stock on Thursday before a significant rebound Friday.
BHI: Stock Analysis
The price of BHI stock has more to do with the price of oil and geopolitical risk than fundamental financial performance, as Baker’s performance has slipped below the S&P 500’s performance amid a fear that oil price drops will continue on weak economic news.
Crude oil prices have tumbled from more than $100 a barrel to just over $80 in the past three months. Although I anticipate the BHI’s trend of increased revenue and earnings to continue, the market is anticipating that lower oil prices will stunt production and have a downward effect on the oil service company’s operations.
With a majority of BHI’s sales coming from the world’s hottest oil market — North America’s shale — I don’t see lower oil prices affecting BHI’s performance in the short to mid-term. The International Energy Agency recently announced that most shale oil production would remain profitable at $80 a barrel or higher.
BHI’s price-to-earnings ratio is a reasonable 18, compared to an industry average of 20.4. Moreover, BHI stock trades at a price/earnings-to-growth ratio of 0.4. An analyst 12-month consensus price target of more than $80 a share leaves plenty of room for stock price appreciation — about 50%, actually. Analyst momentum has turned markedly negative, though, with four recent downgrades. That should be taken into consideration.
BHI is a long-term buy, and a short-term hold. BHI has good earnings growth, good sales growth and bad stock performance, but with oil prices scraping the bottom of where unconventional drilling would be profitable, new investors should wait to buy until next year or global economic conditions start trending in a more positive direction.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
