On Dec 29, 2015, we issued an updated research report on Baker Hughes Inc. BHI, one of the major oilfield service companies in the world.
Baker Hughes boasts a strong portfolio of products and services that should help it post better-than-average results over the long term in North America. It should also enable the company to further expand in the international markets. As the world's third-largest oilfield services provider, the company also has a competitive set of technologies, which allow it to increase its activity in the deepwater Gulf of Mexico (GoM).
The company proactively introduced more than 160 products and services to the market in 2014. These should have a meaningful impact on its earnings and cash flows. The most prominent among these are the ProductionWave solution, FASTrak and SHADOW plug. The company expects to generate additional revenues from these new products within the first year of their commercial launch.
The company sees double-digit revenue growth in the eastern hemisphere and improved margins in the western hemisphere including North America by year-end 2015. Management is banking on North America for better utilization of pressure pumping in the U.S., improved activity in the GoM and increased adoption of new technologies. Internationally, Brazil, Norway, Angola and the Middle East are likely to be the primary growth drivers. Also, the company is hopeful of growth in Venezuela, where, it displayed its prudence by altering its business model through partnerships with local providers, thereby dramatically reducing its working capital exposure.
Additionally, the prospects of the impending merger of Baker Hughes with Halliburton look bright. This is because the joint entity could generate substantial shareholder value through synergies leading to cost cuts. However, the transaction is yet to receive approval from stockholders of the companies, and the antitrust and regulatory bodies. Opposition from any of the above areas could jeopardize the future of the merger deal. Moreover, if the merger falls through, Baker Hughes will have to pay a breakup fee of $1 billion to Halliburton.
Also, crude price has tumbled almost 50% since last June owing to abundant supply of the commodity in the face of lackluster global demand. Adding to the woes, oil price is expected to remain low in 2015 as well. Owing to weak commodity pricing, most of the drillers have decided to halve their 2015 capital spending from that in 2014. Hence, Baker Hughes, which supports drilling players in setting up oil wells, is also expected to earn less in 2015.
Further, management is apprehensive about the current trend among oilfield service providers of growing their inventory of wells drilled but not completed owing to delay in completions and production deferral. The Canadian market is also expected to remain relatively flat until spring. As a result of the reduction in overall activity in North America, the company projects decreased demand for its well construction product lines. On the international front, markets like Continental Europe, Mexico, Australia, Iraq and the North Sea are expected to remain weak.
Zacks Rank and Stocks to Consider
Baker Hughes carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are Energy Transfer Equity, L.P. ETE, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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