With the rise of oil prices over the past several years, more capital has been put into the sector, which should benefit services companies over the coming years. However, not every company in the space is skyrocketing; for example, Baker Hughes Co. (BKR, Financial) shares have only risen around 14% in the last year.
Investing in Baker Hughes could be an appealing option for those who have faith in the medium-term oil cycle. It could be a profitable endeavor given the right conditions.
This year, the world economy is projected to endure several difficulties due to inflationary pressures and tighter monetary conditions. However, Baker Hughes is confident energy demand will keep growing in the long run, with supply remaining tight and new energy sources showing great potential.
Overall, the stock appears to be an enticing prospect considering its positive outlook and favorable risk-reward ratio.
Baker Hughes sets itself up for success in 2023 and beyond
Oil is certainly making its presence felt once again on Wall Street. The Dow Jones U.S. Select Oil Equipment and Services Index has seen 45% growth in the last year, indicating that people are getting more optimistic about the industry's outlook.
This has been great news for the oilfield services sector, especially Baker Hughes, which looks to be a clear leader in this space. Although the share price does not reflect the upswing, its financials suggests the company is moving in the right direction.
The oilfield services and equipment company is seeing increased growth in global markets, while North American spending remains relatively consistent. There are expectations for double-digit spending growth all around, with North America experiencing an uptick in cost inflation.
The company's net income for the final quarter of 2022 totaled $381 million, which translated to 38 cents per share. This was slightly lower than the 40 cents analysts had anticipated.
Last year, Baker Hughes organized its company into two divisions; one specializing in oilfield equipment and services and the other in industrial and energy technology. The restructuring resulted in reported charges of $682 million for 2022.
In its Oilfield Services and Equipment business, revenue increased 12% compared to the previous year and totaled $3.6 billion. Additionally, the Industrial and Energy Technology segment recorded 1% growth in income year over year to $2.3 billion.
In the fourth quarter, total revenue amounted to $5.9 billion; however, it fell short of Wall Street's projections of $6.1 billion. The company anticipates generating between $5.3 billion and $5.7 billion in revenue for the current quarter and full-year 2023 revenue of $24 billion to $26 billion.
Analysts were also optimistic about the adjusted Ebitda of $947 million, which exceeded projections of nearly $925 million.
Perhaps most importantly, Baker Hughes generated an unprecedented $4.3 billion order in its industrial sector during the fourth quarter. This was mainly attributed to its LNG, onshore/offshore and New Energy sectors, with the latter alone capable of garnering $400 million in orders – a 50% year-over-year growth from 2021.
Total orders reached $8 billion for the quarter, a 20% increase from the prior-year period and 32% more compared to the third quarter of 2022.
According to Baker Hughes, the energy industry has entered a multiyear growth cycle that is being driven by economic conditions, safety concerns and decarbonization goals. This growth trend is expected to continue for several years.
Despite the high likelihood of a recession, leading to weakening demand over the next 18 to 24 months, the company is optimistic the demand surge from China's reopening may partially alleviate this situation. The company expects demand for its services to continue rising beyond 2030.
Built to last
Over the years, Baker Hughes has grown to become the third-largest equipment provider.
The oil and gas industry is likely to further expand with a predicted boost in capital spending, so a number of businesses are set to benefit from this trend. Baker Hughes has acquired multiple companies to enhance its operations beyond its core areas of activity. This has enabled it to build several new facilities, including liquefied natural gas, electric generators and pipeline compressors, and offer after-sales services and products for customers in the oil and gas, nuclear and electrical industries. Having a diversified portfolio of products is key to doing well in such an environment.
Management has set high expectations for profitability and shareholder returns. Post its recent restructuring, Baker Hughes said it has reduced expenses by $150 million, promising more cost savings in the future.
It is anticipated that return on invested capital will surpass 15% between 2024 and 2025 across the board, with a substantial portion of this being distributed to shareholders in the form of both dividends and buybacks.
Consequently, Baker Hughes is in an outstanding position to flourish due to its established business and some major growth catalysts. In addition, the management team is focusing on both profits and shareholder returns. All in all, this depicts a strong thesis.
Takeaway
Baker Hughes is a good option for those looking to venture into the oil and gas industry. The company has an impressive story with more than a century of business experience, having started by making drill bits.
The company has certainly come a long way. Far from being just an oilfield supplier, it has its hands in other fast-growing alternative energy sectors. This transition is proving to be beneficial for the company.
Even though the coming months may be tough for the company, there is still much to look forward to.
