Baker Hughes another downside buying opportunity in oil services
Baker Hughes retreats on weak results
Baker Hughes (New York Stock Exchange: BKR) pulls back on weak results and the company missed the top and bottom results. What he didn’t do was give what we consider a bad report, just a report that didn’t meet expectations. The conclusion for us is the outlook, the company echoed competitor Haliburton’s comment, in that it sees a long-term upside energy cycle about to unfold. That alone isn’t really enough, but it takes on new meaning when you consider the rise in new orders. New orders are up in all segments and over 100% on an annual basis in some. Baker Hughes may have missed its expectations for the first quarter, but this is historical data. Forward-looking data suggests that the company is poised for an increase in business that will be sustained for several years.
“…We are seeing a favorable oil and gas price backdrop, but also a dynamic operating environment. Recent and unfortunate geopolitical events are exacerbating several trends, including widespread inflation and pressures on the supply of key materials, commodities and labour. Despite some challenges, we are optimistic about the outlook in our two core business areas and excited about the new energy investments we are making for Baker Hughes. We believe we are well positioned to benefit from a prolonged cyclical recovery in the upstream oil and gas sector and longer-term structural growth trends in LNG, new energy and industrial asset management,” said Lorenzo Simonelli, President and CEO of Baker Hughes. officer.
Baker Hughes falls below first-quarter estimates
Baker Hughes had a good quarter in terms of operations, but a quarter below consensus. The company reported revenue of $4.83 billion, down 12% sequentially but up 1% year-on-year. However, revenue missed the consensus by 360 basis points and this weakness carried over to the bottom line. On a sector basis, oil services rose 13% while equipment and turbomachinery fell 16% and 9%. Digital grew by 1%, but it is by far the smallest segment.
There is good news in the report, however, as the company was able to expand its margin compared to last year. Adjusted operating profit increased by 29%, leading to an 11% increase in adjusted EBITDA. The bad news is that the adjusted earnings of $0.15 is $0.05 lower than the Marketbeat.com consensus, but we believe this loss will be made up for in the coming quarters. New orders data is very encouraging and suggests a double-digit increase in services and a triple-digit increase in equipment and turbomachinery sales. Equipment and turbomachinery sales accounted for about 38% of net sales in the first quarter, so this is important data. We believe that increased sales will lead to both revenue and margin gains.
Analysts will drive Baker Hughes higher
Analysts are bullish on Baker Hughes but Marketbeat.com’s consensus is mixed. The rating is a firm buy, but the price target suggests the stock is fairly priced. What these figures do not reveal, however, is the upward trend in consensus. The last 5 analyst price targets have stocks trading above $40, which we think is okay.
The price action is pulling back in pre-trade trading, but we think buyers will support it above the EMA in the near term. Assuming this to be true, we see price action rebounding from the EMA and confirming the trend in place. The next hurdle will be the resistance at $38 but, if overcome, the stock will confirm a bullish triangle and a bigger upward move to follow. Otherwise, the price action could fall below the short-term EMA, but we see strong support for this oilfield stock at 1.96% above $32.
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