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How Does Baker Hughes’ Management See 2016?

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Mar. 21 2016, Updated 9:04 a.m. ET

What does Baker Hughes’ CEO think?

Baker Hughes’ chairman and chief executive officer, Martin Craighead, cautioned about the challenges lying ahead in fiscal 2016. In the 4Q15 press release, he said, “At current commodity prices, the global rig count could decline as much as 30% in 2016, as our customers’ challenges of maximizing production, lowering their overall costs, and protecting cash flows are now more acute.”

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Has Baker Hughes–Halliburton merger elevated BHI’s cost structure?

Baker Hughes’ management considers that its 4Q15 operating profit margin was favorably impacted by its cost reduction efforts. However, the Halliburton–Baker Hughes acquisition-related costs reduced earnings.

In the 4Q15 press release, BHI’s Craighead commented, “Additionally, embedded in our operating margins are costs in excess of 300 bps, or in excess of ($0.16) EPS impact, which are retained in compliance with the merger agreement and preparations for the combined Baker Hughes/Halliburton entity.”

Analysts’ targets for Halliburton

Given the energy prices’ unpredictability, the lowest analysts’ target price for Baker Hughes is $41 and the highest is $75. The median target price for BHI, surveyed among the sell-side analysts, is $57. Baker Hughes is currently trading near $44, implying a 30% upside at its median price.

Oil States International (OIS), Halliburton’ peer, received a $29 median target price. This, relative to its current price of ~$30, implies a downside of less than 1%. BHI is 1.5% of the iShares US Energy ETF (IYE), but for investors looking for exposure to the oil and gas equipment and services industry, it makes up 15.2% of IYE.

Next, we will discuss Baker Hughes’ revenue and earnings.

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