The Bottom Fishing Club: Baker Hughes

Summary

• Baker Hughes is standing on stronger financial footing vs. peers in the oilfield services group.
• The company is focusing on offshore and liquid natural gas exploration and production, using new high technology techniques.
• Valuations are cheap, and any turnaround in oil and gas fortunes should create solid investment gains from here.

Baker Hughes (NASDAQ:BKR) represents a lower leverage, oil & gas services choice for exposure in beaten down energy stocks. With the nosedive in petroleum related stocks this week, bottom fishing ideas are plentiful in the sector. Just like my last pick, EOG Resources (EOG), Baker Hughes is a quality blue-chip name, holding less than industry normal debt levels, and better than average profit margins in the oil services area. Baker Hughes looks to have even safer financial metrics and operating diversification in 2020 than major competitors National Oilwell Varco (NOV), Halliburton (HAL) or Schlumberger (SLB).

Image Source: Company Website

General Electric (GE) owned a 62% controlling interest in early 2019, reducing its stake to around 38% the past year. To a degree investors in Baker are still basically limited partners with GE, regarding day-to-day business decisions. I purchased shares Monday at the open, using the panic selling you see about once every decade in oil names to my advantage. Nearly every energy related company was down between 5% and 70%, 15% for a sector average, early this week.

Irina Slav wrote an excellent summary article on Seeking Alpha, “Shale-Free Baker Hughes Best Bet Among Big Three” explaining the company’s move out of the U.S. shale market into offshore and liquefied natural gas exploration and production development. The company is also investing in new technologies, an effort to sell their services as the leading research & development outfit, using final productivity per dollar spent as a key selling point for clients. Over the short-run, 2017’s exit out of the more cyclical shale development business is already paying dividends, as the company was one of only a handful of large-scale oil service organizations able to report GAAP income in 2019.

Some quick history. When you adjust for CPI inflation, crude oil and natural gas

Analyst’s Disclosure:I am/we are long BKR, EOG. 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.

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