Thoughts from the CEO
Baker Hughes’s (BHI) management warned about further rig count declines in 2016. In the 1Q16 earnings press release, Baker Hughes Chairman and Chief Executive Officer Martin Craighead stated that “In the second quarter, we forecast the North America rig count to fall 30% compared to the first quarter average.”
Craighead also stated that “for the second half of the year, we project the US rig count will begin to stabilize, although we do not expect activity to meaningfully increase in 2016,” adding that “the international rig count is predicted to drop steadily through the end of the year as we see limited new projects in the pipeline.”
The BHI-HAL merger termination
Baker Hughes’s management expects its cost structure to improve following the merger termination with Halliburton (HAL) on April 1. BHI had retained these costs in compliance with the former merger agreement with HAL. In addition, the company may reduce workforce costs and improve efficiency by rationalizing its full-service model. In the initial phase, the cost-reduction effort is expected to result in $500 million of annualized savings by the end of 2016.
Analyst targets for Baker Hughes
Given the current unpredictability of energy prices, the lowest analyst target price for Baker Hughes is $38 while the highest is $63. The median target price surveyed among sell-side analysts for BHI is $51.2. Baker Hughes is currently trading near $45, implying 14% upside at its median price.
By comparison, Precision Drilling (PDS) received a $4.9 median target price. Relative to its current price of ~$4.4, this implies an upside of less than ~13%. Notably, BHI makes up 0.07% of the WisdomTree LargeCap Dividend ETF (DLN).
Now let’s discuss Baker Hughes’s revenue and earnings.