Baker Hughes, Another Buy-The-Dip Opportunity In Oilfield Services

Baker Hughes Pulls Back On Weak Results 

Baker Hughes (NYSE: BKR) is pulling back on weak results and the company did miss on the top and bottom lines. What it did not do was give what we consider to be a bad report, just one that fell short of the expectations. The takeaway for us is the outlook, the company echoed commentary from competitor Haliburton, in that it sees a long-term upcycle in energy about to unfold. That alone isn’t really enough but it takes on new meaning when you consider the uptick in new orders. New orders are up in all segments and greater than 100% on a YOY basis in some. Baker Hughes may have missed its expectations for the Q1 period but that is rear-looking data. The forward-looking data suggest the company is about to experience a surge in business that will be sustained for several years. 

“ … We see a favorable oil and gas price backdrop but also a dynamic operating environment. The recent and unfortunate geopolitical events are exacerbating several trends, including broad-based inflation and supply pressures for key materials, commodities, and labor. Despite some of the challenges, we are optimistic on the outlook across both of our core business areas and excited about the new energy investments we are making for Baker Hughes. We believe that we are well-positioned to benefit from an extended cyclical recovery in upstream oil & gas and longer-term structural growth trends in LNG, new energy, and industrial asset management." said Lorenzo Simonelli, Baker Hughes chairman, and chief executive officer.

Baker Hughes Falls Short Of Q1 Estimates 

Baker Hughes had an OK quarter in regards to operations but one that fell short of the consensus. The company reported $4.83 billion in revenue which is down 12% sequentially but up 1% YOY. The revenue missed the consensus by 360 basis points, however, and that weakness bled through to the bottom line. On a segment basis, Oilfield Services rose by 13% while Equipment and Turbomachinery fell by 16% and 9%. Digital grew by 1% but it is the smallest segment by far. 

There is good news in the report, however, because the company was able to widen its margin versus last year. The adjusted operating income increased by 29% to drive an 11% increase in the adjusted EBITDA. The bad news is that adjusted earnings of $0.15 fell short of the Marketbeat.com consensus by $0.05 but that loss, we think, will be made up in future quarters. The new orders data is very encouraging and suggests a double-digit increase in services and triple-digit increases in Equipment and Turbomachinery sales. Sales of Equipment and Turbomachinery were about 38% of the net revenue in Q1 so this is significant data. In our view, the increase in sales will drive both revenue and margin gains. 

The Analysts Will Drive Baker Hughes Higher 

The analysts are bullish on Baker Hughes but the Marketbeat.com consensus is mixed. The rating is a firm Buy but the price target suggests the stock is fairly valued. What those figures don’t reveal, however, is the trend in consensus which is on the rise. The last 5 analysts' price targets have the stock trading above $40 which is where we think it is going. 

Price action is pulling back in premarket trading but we think buyers will support it above the short-term EMA. Assuming this is true, we see price action bouncing from the EMA and confirming the trend that is in place. The next hurdle will be resistance at the $38 but, if that is overcome, the stock will be confirming a Bullish Triangle and a larger upward movement to follow. If not, price action could fall below the short-term EMA but we see strong support for this 1.96% yielding oilfield stock above $32.