Baker Hughes - A General Electric Company

| About: Baker Hughes, (BHGE)
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Summary

Baker Hughes stock price peaked before the start of the oil crash at just over $75 per share. The company's recent recoveries make it close to pre-crash highs.

Baker Hughes shareholders have recently received a $3.5 billion breakup fee with Halliburton and will receive another $7.4 billion from General Electric.

The combined company will have the potential to become the largest oilfield services company with significant synergies and future earnings growth potential.

Baker Hughes (NYSE: BHI) has performed surprisingly well since the start of the oil crash two and a half years ago. The company's stock price is just over 10% below where it was at the start of the crash despite capex still being roughly half of its pre-crash peak. On top of this, Baker Hughes received $3.5 billion after the breakup of its merger from Halliburton (NYSE: HAL) and is currently being merged with General Electric (NYSE: GE).

As a result of these catalysts, Baker Hughes has the potential to become a market leading oilfield service company.

Introduction

Baker Hughes is an American industrial service company and one of the world's largest oilfield service companies behind Schlumberger (NYSE: SLB) and Halliburton. The company has a market cap of just over $27 billion compared to a market cap of $46 billion for Halliburton and $118 billion for Schlumberger. Despite its size and a difficult oil environment, Baker Hughes stock price has continued to hold near pre-crash highs.

Baker Hughes - Wall Street Journal

Baker Hughes' stock price peaked in mid-2014 at just over $75 per share. Baker Hughes' stock price bottomed out at less than $40 per share in January 2016, when oil prices bottomed out. However, the company received $3.5 billion from Halliburton this year and recently General Electric has announced a merger with Baker Hughes. And since then, the company's stock price has recovered to just over $65 per share.

Despite this recovery, Baker Hughes still has impressive future potential.

Baker Hughes Transaction Announcement

Under the terms of the merger, General Electric will contribute its petroleum business and cash for a special $17.5 per share dividend for Baker Hughes shareholders in exchange for 62.5% of the combined business. This $7.4 billion payout to shareholders helps supports General Electric's slightly higher stake in the business.

Baker Hughes Transaction Overview - Baker Hughes Investor Presentation

The above image gives an overview of the combined entity as we discussed above. General Electric will hold 62.5% of the combined entity while Baker Hughes will hold the other 37.5%. In addition to this equity and a $17.5 per share dividend, Baker Hughes shareholder also receive a portion of a business that has the potential to become the second largest oilfield services company beating out Halliburton, and potentially over time, the largest.

Baker Hughes Combined Company - Baker Hughes Investor Presentation

Baker Hughes anticipated ~$34 billion in revenue in 2020 spread across more than 120 countries and approximately 70 thousand employees. The company will dominate every aspect of the oilfield services energy including finding, producing and transporting hydrocarbons. Liquefied natural gas is especially a rapidly growing industry and the dominance here should help with future earnings.

Baker Hughes Innovation

Now that we have an overview of the combined company and have discussed the transaction, it is now time to discuss the innovation of the combined company with its new market leading position.

Baker Hughes Adding Value - Baker Hughes Investor Presentation

Oil is, more and more so every day, becoming a business dominated by technology, the latest technology and infrastructure is essential to future cost effective growth. The new company will have the combined assets to serve as a go-to competitive service provider for oilfield services. The company anticipates it will gain a larger portion of project capex and will have a strong stake in growing projects.

The New Baker Hughes - Baker Hughes Investor Presentation

Baker Hughes anticipates growing from 80 to more than 120 countries, or a growth of more than 50%. The company anticipates that its global coverage will expand to subcontinental Africa, offshore West Africa, and offshore Brazil. These three sources of growth will bring significant additional income to Baker Hughes and allow the company to take advantage of growing industries.

On top of this, Baker Hughes will gain access to around $70 billion of increased spent with NOCs and a bias towards integration. This growth in spend from $12 billion in 2018 to $94 billion from 2018 to 2021+ will give the new Baker Hughes company a significant opportunity for future growth. As we see, that Baker Hughes is competing to become what might potentially be the largest oilfield service company, a very rewarding opportunity for its shareholders.

Baker Hughes Key Sources Of Growth

Now that we have discussed the company overall including the transaction and the significant innovation the company is undertaking, it is now time to finish up by discussing Baker Hughes key sources of future growth.

Baker Hughes American Oil Spending Growth - Baker Hughes Investor Presentation

North American anticipates growing production from both North American unconventionals and spending by 9 million barrels per day from now until 2020. This is amazing growth that accounts for 10% of the worldwide oil production and will cost $166 billion to achieve. By 2020, technology intense unconventional production will account for 70% of total US production. This is an enormous opportunity for Baker Hughes.

The US + Canada will result ~80-90% of unconventional production in 2020 with significant capex spend. Particularly, shale plays will be a significant portion of annual spending. Baker Hughes should be a significant position to take advantage of this growth and this should help the company's long-term earnings growth.

Baker Hughes Offshore Growth - Baker Hughes Investor Presentation

Another significant source of potential growth is the offshore oil fields. Technology and Baker Hughes are influencing up to 55% of offshore development spending. Baker Hughes has a significant stake in this production and with this intense spending, the company should see its earnings grow significantly. Assuming tens of billions of offshore spending, Baker Hughes will control 55% of this and this should provide the company with significant continued earnings growth.

Baker Hughes Financials

Now that we have discussed Baker Hughes as a company including the transaction and the portfolio innovation, it is now time to finish up by discussing the financials.

Baker Hughes 2020 Synergy Benefits - Baker Hughes Investor Presentation

Baker Hughes anticipates synergies growing all the way to $1.6 billion in 2020F. Assuming a combined company market cap of roughly $55 billion (Baker Hughes - $7.4 billion dividend / 32.5% component of new company), that means that these estimated synergies amount to a 3% return for the company. As a result, these synergies alone are enough to make the combined company's earnings increase significantly.

This shows the strength of the combined company and its earnings growth potential.

Conclusion

Baker Hughes has done surprisingly well since the start of the market crash with the company's present stock price 10% below the company's pre-crash highs. This is in the face of oil prices that are a staggering 50% below pre-crash highs and in the face of a declining capex. On top of this, Baker Hughes has achieved a $3.5 billion breakup fee and a merger with General Electric has recently been announced.

However, this merger brings more than two companies being combined. It brings the opportunity for the combined entity to become the second-largest and one day, maybe the largest oilfield service company. The combined company will provide customers a fully integrated solution with significant earnings potential. On top of this the combined company will have significant synergies of $1.6 billion.

As we can see, this combined company will be a strong investment opportunity.

Disclosure: I am/we are long BHI, SLB, HAL, GE.

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.