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Does BHI Expect Deepwater Activity to Spoil the Party in 2017?

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Baker Hughes’s stock price reaction

Baker Hughes (BHI) released its financial information for 4Q16 on January 26, 2017. Its stock reacted slightly negatively immediately following the earnings release. On that day, the stock fell 0.8% to $63.1 from the previous day’s close, reflecting the market’s disappointment over BHI’s 4Q16 earnings missing estimates, as we discussed in the previous parts of this series.

Halliburton (HAL), the second-largest oilfield equipment and services (or OFS) company by market capitalization, was down 3% following the release of its financial information for 4Q16 on January 23. Read an analysis of HAL’s 4Q16 financial results in Market Realist’s Halliburton: A Word on the 4Q16 Results.

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BHI’s stock price movement compared to industry

As noted in the graph above, in the past one year, Baker Hughes’s stock rose 58%. It has performed nearly in line with the VanEck Vectors Oil Services ETF (OIH), which has produced ~55% returns. The Energy Select Sector SPDR ETF (XLE), the broader energy industry ETF, has produced 36% returns. Baker Hughes has also outperformed the SPDR S&P 500 ETF (SPY), which generated 21% returns during the same period. BHI makes up 0.13% of SPY. However, BHI has underperformed West Texas Intermediate (or WTI) crude oil prices, which have recovered 67% in the past one year.

What does Baker Hughes’s management anticipate in 2017?

In 1H17, BHI management expects a give-and-take between stronger North American upstream activity and a steep decline in deepwater activity. In the 4Q16 earnings press release, Martin Craighead, BHI’s CEO, commented, “Looking ahead for the first half of 2017, we expect onshore revenue in North America to increase as our customers ramp up activity, with service pricing improving but limited by overcapacity. Internationally, we are forecasting activity declines and continued pricing pressure, with pockets of growth onshore. In offshore markets, particularly deepwater, activity declines are expected to be more severe.”

What could change the game for Baker Hughes?

Baker Hughes’s outlook could change if its partnership with GE (GE) goes through successfully. On October 31, 2016, GE disclosed that it will combine its oil and gas business with Baker Hughes. You can read more about this in Market Realist’s Can the BHI-GE Partnership Benefit from Global Growth?

Next, we’ll discuss Wall Street analysts’ targets for Baker Hughes.

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