Pat McKeough recently replied to a member of his Inner Circle looking for guidance on Baker Hughes. The world’s third largest drilling services company has moved on after a failed takeover bid by Halliburton. It’s now putting a $3.5 billion breakup fee to good use, says Pat.
Q: Hi Pat: I would like your opinion on Baker Hughes. Thanks.
A: BAKER HUGHES (symbol BHI on New York, www.bakerhughes.com), is the world’s third-largest drilling services and equipment company.
Until recently, Baker Hughes was the subject of a $35 billion takeover offer from Halliburton (symbol HAL on New York). However, the deal fell through because of opposition from U.S. and European antitrust regulators.
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The merger would have brought together the world’s No. 2 and No. 3 oil services companies. That raised concerns about possibly higher prices for oil producers.
Because the deal fell apart, Houston-based Baker Hughes will now receive a $3.5 billion breakup fee from Halliburton. With the proceeds, it plans to buy back shares totaling $1.5 billion. It will also pay off $1 billion of its debt.
Energy Stocks: Oil rig count drops by 50%
The company holds cash of $2.2 billion, or $5.02 a share. Its $3.9 billion long-term debt is a low 19.4% of its $20.1 billion market cap.
The collapsed merger deal with Halliburton comes as both companies struggle to cope with the impact of low energy prices on their businesses.
Excluding one-time items, in the three months ended March 31, 2016, Baker Hughes lost $701 million, or $1.58 a share, compared to its loss of $32 million, or $0.07, a year earlier. The consensus estimate for the 2016 quarter had been for a loss of just $0.33 a share.
Revenue also fell, 41.9%, to $2.67 billion from $4.59 billion.
The company’s rig count—the number of oil and gas rigs it operates—continues to drop due to sharp cutbacks in drilling activity. For North America, the count fell 58% in the last quarter; it dropped 46% in Latin America. Baker Hughes feels its drilling business will bottom out by the end of this year. But, it doesn’t expect its earnings to start improving until 2017. The exact timing depends on the direction of oil and gas prices and drilling activity.
The stock is okay to hold, but only for aggressive investors.
Inner Circle recommendation: HOLD for aggressive investors
For our investment perspective on Canadian oil and gas, read The time to invest in Canadian oil stocks is now—or is it?
For our recent report on a Canadian energy stock that we rate as a buy now, read Peyto Exploration and Development lifts production on lower costs.
