Is Baker Hughes A Good Stock To Buy?

Jun. 6.14 | About: Baker Hughes (BHI)


Strong investment from the energy sector is generating demand for oilfield services companies.

Baker Hughes is well set to capitalize on demand.

Baker Hughes looks expensive compared to the peer group.

Baker Hughes's (NYSE:BHI) price surged almost 58% in the past year alone. The company is on momentum with the strong demand for its oilfield products and services. Because, Exploration & Production and Oil and Gas Integrated companies have been making strong investments over the past years, which have generated demand for the drilling and exploration companies, and thus the demand for Oilfield Service providers are increasing over the years. With innovative product and technologies, Baker Hughes capitalized on the demand. Its revenue growth was at 15% in the past three years. The company has generated record revenue growth in the past three successive years.

Baker Hughes provides products and services for the drilling and evaluation of oil and gas wells, completion and production of gas and oil wells, reservoir technology and fluids and chemicals. Baker Hughes's innovative products and technologies kept it in the market and allowed it to get new contracts. The company has demonstrated this trend again in the recent quarter by generating a 10% growth in revenues over the past year quarter. Rising demand for its products particularly in North America, Middle East and Asia pacific led it to generate strong growth. Further, higher operational efficiencies allowed it to post a 29% increase in adjusted earnings over the past year quarter.

In Brazil, Baker Hughes has applied high technology logging-while-drilling (LWD) services, advanced drilling services, the DKD™ dynamic kill drilling fluid system and remote monitoring to a highly complex deep water well in an unstable weather condition. In Nigeria, the company's advanced wireline services and latest-generation LWD technologies are generating strong growth. In Gulf of Mexico, the company has used wireline-conveyed cased hole logging and mechanical services on an ultradeep gas well with temperatures reaching 500°F (260°C). Further, in the recent quarter, it installed the deepest subsea boosting system ever in the Gulf of Mexico.

Therefore, with the latest products and technologies, it won multiple contracts in the Middle East, Australia, and North Africa and in other regions. It was awarded the biggest ever artificial lift contract for the Middle East. It has secured multiples contracts in the Middle East for its wireline services and completions systems. It also received considerable orders for FLEXPump in Russia. Its FracPoint™ multistage fracturing system continues to generate demand in the International markets. Overall, its innovative products and technologies are generating strong demand in the international markets. Further, its focus on enhancing operational efficiencies are ensuring substantial profits in this year and beyond.

Baker Hughes's cash generating potential is also strong enough to support capital investments and returns for investors. The company's capital expenditure decreased to $439 million in the recent quarter from $490 million in the same quarter last year. The company is further looking to lower its capital investments to give a boost to free cash flows. Baker Hughes is looking to create a value for the shareholders by enhancing its free cash flows. Recently, it announced a 13% increase in dividends. At the moment, its free cash flows are covering its dividend payments.

In Conclusion






Industry Average

Price/Earnings TTM












Price/Sales TTM






Forward P/E






Rev Growth (3 Yr Avg)






Net Income Growth (3 Yr Avg)












Dividend Yield






Click to enlarge


Demand for the oilfield services companies has been increasing with the stabilization of the economy and increased investments from the entire energy sector. Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and National Oilwell Varco (NYSE:NOV) had generated record growth in their revenues in the past three years as illustrated in the table. However, Baker Hughes and Halliburton were not able to translate record revenue growth into high profits. Baker Hughes's profit decreased in the past three successive years even with the record revenue growth. On the other hand, NOV and SLB comfortably increased their profits over the past years. However, in the latest quarter, Baker Hughes successfully reduced its operational cost, which resulted in a huge increase in earnings over the past year quarter.

But, the negative trend in Baker Hughes's earnings and consistent surge in the share price makes it a bit expensive over the peers, based on a price to earnings ratio. At the moment, it is trading around $72 per share, which is well above the analyst's price target of $70/share. It's forward P/E of 13 shows that the company has upside potential. Further, it is likely to produce better profit and cash flows in this year. Amid this, I do not recommend initiating a position in a company when it is trading at high multiples instead investors should wait for a market correction before initiating a position.

Alternatively, National Oilwell Varco looks like an interesting pick to me for the long-term investor. The company has recently completed the spin-off of its distribution business and announced a 75% increase in its dividends. Its remaining business segments are generating strong growth for the company. Further, it is trading at attractive multiples compared to the peer group with the highest dividend yield. In my recent article, I explained at length about NOV's business model, strategies and future prospects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.