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Is it Worth Holding Baker Hughes (BHI) Despite Weak Oil?

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We issued an updated research report on Baker Hughes Incorporated on Sep 26, 2016.

The company enjoys a leading position in the North American oilfield services market and has a strong liquidity position. However, the persistent crude price weakness is likely to hinder the company’s business going forward.

As a result, Baker Hughes carries a Zacks Rank #3 (Hold), implying that it will perform in line with the broader U.S. equity market over the next one to three months.

Baker Hughes – the world's third-largest oilfield services provider – boasts a strong portfolio of products and services. This should help it post better-than-average results over the long term in North America and enable it to further expand in the international markets. The company also has a competitive set of technologies, which allow it to increase its activity in the deepwater Gulf of Mexico (GoM).  

It is to be noted that with the termination of the impending merger with Halliburton Company (HAL - Free Report) , Baker Hughes has received a break-up fee of $3.5 billion. This will strengthen its balance sheet and liquidity as well as enable it to pursue a number of value-creating options.

Moreover, we appreciate the company’s cost management amid persistently weak oil. In fact, the company is on track to lower its annual cost by $500 million by 2016.  

However, we expect Baker Hughes' business to remain stressed as oil price are expected to remain weak till next year. Despite the recent recovery in oil prices from the mid-February lows, it is still under $50 and far below the breakeven price for many energy companies. As a result, most of the drillers have decided to significantly cut their 2016 capital spending from the 2015 level. Hence, Baker Hughes, which supports drillers in setting up oil wells, is also expected to earn less in 2016. On top of that, the OPEC and IEA recently predicted that the crude market is likely to remain oversupplied till 2017. This might keep oil prices low in the coming months, which is likely to further lower earnings for Baker Hughes.

Leading oil field players like Schlumberger Limited (SLB - Free Report) and Halliburton might also be impacted by weak oil.

A Stock to Consider

A better-ranked player in the energy space is Rice Midstream Partners LP (RMP - Free Report) . The partnership’s earnings for the current year are expected to increase 81.2% year over year. Rice Midstream sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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