Why Baker Hughes Now Looks So Attractive After Its GE Merger

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Being in the oil and gas services business has been painful for investors of late. Many oil and gas outfits have recovered massively from the 2015 and 2016 sell-off, but the oil services sector has seen many of its key players trade down to multiyear lows.

Baker Hughes, A GE Company (NYSE: BHGE) has been initiated with a Buy rating at the independent research firm Argus. The firm also assigned a price target of $43 for the stock.

As a reminder, the old Baker Hughes is now the “newco” Baker Hughes under General Electric Co. (NYSE: GE). The companies combined into GE’s oil and gas business in early July upon completion of their merger. GE has a 62.5% interest, and legacy Baker Hughes shareholders have a 37.5% stake.

Argus established estimates of $0.36 earnings per share (EPS) for 2017 and $1.62 EPS for 2018 for the new company. Its estimates assume a gradual increase in crude oil prices, as well as increased drilling activity and modest margin growth with stronger improvement in 2018. Thomson Reuters has its consensus sell-side analyst targets at $0.60 EPS in 2017 and $1.78 in 2018.

The new report shows that the new Baker Hughes pay a quarterly dividend of $0.17 per share ($0.68 annually) for a yield of about 2.0% at current prices. Argus has its dividend estimates static at $0.68 for both 2017 and 2018.

Most new “buy” and “outperform” analyst ratings in Dow and S&P 500 stocks are calling for upside of 8% to 15% at this point in the eight-year bull market. You can more than double the top-end of that range for this upside projection. According to the Argus report:

We expect GE’s strength in digital technology to complement Baker Hughes’ traditional energy services and equipment offerings. We also expect the combined company to compete more effectively with close rivals Halliburton and Schlumberger. Our target of $43 implies a potential total return, including the dividend, of 32% from current levels.

While Argus has a new Buy rating and is calling for 32% upside in the new Baker Hughes, the firm’s rating on the energy sector is Market-Weight. The firm did point out that, while oil prices have moved higher, the energy sector has not yet rebounded in terms of capital investment nor in the replacement of lost production. Argus believes that those issues are the next steps in the recovery process.

The Argus forecast noted that West Texas Intermediate crude should average $52 per barrel in 2017. The firm also expects oil prices to remain volatile, and it has now called for a full-year price range of $42 to $60 per barrel from a prior range of $43 to $66.

24/7 Wall St. never relies on just one analyst opinion. After all, we wouldn’t want you thinking there is only upside just because an analyst says so. We have compiled other recent analyst views as well, as follows:

  • On the same day as Argus, Susquehanna lowered its price target to $41 from $49.
  • On August 19, CFRA (S&P Equity) kept a Strong Buy rating with a $43 price target.
  • On August 8, RBC Capital Markets maintained an Outperform rating and $54.50 price target.
  • On August 7, Jefferies maintained a Hold rating but set a new target of $40 after having been at $67 before the merger.
  • On August 2, Evercore ISI maintained its Outperform rating with a $47 price target.
  • On July 18, Goldman Sachs reinstated coverage as “Sell” with a $37 target price.

Baker Hughes shares were down 15 cents at $32.62 in Monday’s midday trading session. Its consensus sell-side analyst price target from Thomson Reuters is currently listed as $50.60, but that consensus target price has been coming down handily after prices adjust from the special merger payout in July and as analysts ratchet down oil expectations.

This stock price was $36.71 at the close on July 31 and was trading at $37.07 on July 5, after its special $17.50 cash payout was effected on a post-merger basis.