🛢 Is Baker Hughes’ Price Baking In Performance?

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🛢 Baker Hughes: Great Expectations?

Oilfield services and equipment firm Baker Hughes Co. (BKR) missed street expectations. Poor revenue growth at a time when oil prices rallied left investors sulking. With supply-side challenges compounded due to the Russia-Ukraine conflict, is the company now on a slippery slope?

No Boil Despite Oil

Oil has touched the Nadir and the Zenith in the past couple of years. From negative price per barrel at the height of the pandemic to multi-year highs, it has been a swift, volatile, and unpredictable journey. When Russia invaded Ukraine, supply fears pushed Brent Crude past the $130 per barrel mark. A slight cool-off notwithstanding, prices remain comfortably on the high side.

Baker Hughes is the second-largest oilfield contractor globally after Schlumberger and provides services to oil & gas companies pertaining to drilling, production, and reservoir consulting. It also offers a range of industrial services to the downstream chemicals, processing, and pipeline markets and has offices worldwide.

The company merged its oil & gas business with GE in 2017, just as oil prices crashed. Under the burden of its debt, GE started selling its stake in Baker Hughes right when oil prices started shooting up. Having started with a 63% stake in Baker Hughes, GE currently owns ~25% of the company.

There was an allegation back in 2019 – which ultimately was unfounded – that GE had hidden losses to the tune of $38B and used Baker Hughes as one of the vehicles. The findings were termed “bigger than Enron.” Baker Hughes denied it all, and eventually, the issue died its natural death.

With oil prices riding high and oil companies large and small reporting large profits, expectations from Baker Hughes were high as well. As a result, its shares surged to a 52-week high last month in anticipation of a blowout quarter. That was not to be, however!

Drilling Underperformance

Baker Hughes’ performance left a lot to be desired as both EPS and revenue missed expectations.

Key Highlights From Q1:

  • Revenue: $4.83B Vs $5.02B expected
  • Earnings Per Share: $0.08 Vs $0.19 expected
  • Net Profit: $72M Vs Net Loss of $452M Y-o-Y

Not only did revenue fall well below estimates, but it also grew at a paltry 1% Y-o-Y and was down 12% compared to Q4 2021. The company pointed to lower volumes in all the businesses and the struggle in moving people and equipment to Russia, which counts as one of the biggest oil-producing nations globally.

Unlike peers like Halliburton, which stopped all existing projects in Russia, Baker Hughes continues to operate in the country and has only put an end to future investments. For the quarter, Russia represented 4% of the overall topline. Even as it struggles with importing technology into Russia due to sanctions, Baker Hughes hopes to bag newer LNG projects in Europe.

Last week, the company acquired Mosaic Materials to enhance its carbon dioxide capture utilization and storage business as it looks to position itself as a leader in LNG and new energy.

Baker Hughes’ oilfield equipment business was the biggest underperformer during the quarter. Segment revenue dropped 16% Y-o-Y alongside an operating loss of $8M (compared to a $4M profit in the year before quarter). The business received orders worth $6.84B during the quarter, up only 3% Y-o-Y despite the skyrocketing oil prices.

On the contrary, peers such as Halliburton offered a rosy outlook for the next few years, with a plan to increase North American spending by 35% (as against 25% earlier). Halliburton’s net profit also doubled from the year-ago period.

It’s becoming clearer that the company’s reliance on Russia, concomitant operational challenges, and supply-side issues were more problematic than expected. It wasn’t a surprise then that investors balked, and the shares suffered their worst day in two years. Baker Hughes finds itself on a slippery slope and needs to get its act together soon. There’s no use crying over spilled oil!

Market Reaction
BKR ended at $31.28, down 0.22%.

Company Snapshot 📈

BKR $31.28 -0.07 (0.22%)

Analyst Ratings (28 Analysts) BUY 75%  HOLD 25%  SELL 0%

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Later Today 🕒

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Today’s Fun Fact

Small businesses generate 13 times more patents per employee than large patenting companies

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