Baker Hughes Rebound Is In The Works 

Shares of Baker Hughes (NYSE: BKR) fell roughly 5.0% in the wake of the Q2 results but we are viewing the drop as a buying opportunity that could be worth 40% or more over the next few quarters. The company missed the top and bottom line estimates which is not something we like to see but there mitigating factors. Among them are underlying momentum within the business and the prospect of recouping lost business in Russia as oil producers work to offset the loss of Russian supply 

“As we look to the second half of 2022 and into 2023, the oil markets face an unusual set of circumstances and challenges. On one hand, the demand outlook for the next 12 to 18 months is deteriorating, as inflation erodes consumer purchasing power and central banks aggressively raise interest rates to combat inflation. On the other hand, due to years of underinvestment globally and the potential need to replace Russian barrels, broader supply constraints can realistically keep commodity prices at elevated levels even in a scenario of moderate demand destruction. As a result, we believe the outlook for oil prices remains volatile, but still supportive of strong activity levels as higher spending is required to re-order the global energy map and likely offsets demand destruction in most recessionary scenarios.”

Volatile Q2 Results Send Baker Hughes Lower

If there is a single word that can be used to describe Baker Hughes Q2 results it is volatile because so many of the metrics moved in opposite directions. The revenue of $5.05 billion, for instance, is up sequentially but down YOY and missed the analyst's consensus which suggests the business is rebounding but not as strong as expected. Strength in the Oilfield Services group was offset by weakness in Oilfield Equipment and Turbomachinery and the mixed quality of results does not end here. 

On the bottom line, the GAAP margin contracted sharply but almost entirely because of exiting Russia while the adjusted margin improved. That said, the $0.11 in adjusted EPS fell short of the analyst consensus by $0.11 but the takeaway for us is that operating income and FCF both improved YOY.

Turning to the outlook, the guidance that we have is as mixed as the rest of the report although the bias is bullish. The company reports a sequential downtick in new orders of -14% that suggests the business has peaked, the bullish aspect is that new orders are up 15% versus last year and demand appear to be strong. The company’s book-to-bill ratio came in at 1.2 which tells us new orders are still coming in faster than they are getting filled and points to steady if not growing revenue over the next few quarters. 

Baker Hughes Dividend Is Safe, For Now 

Baker Hughes pays a reasonably attractive 2.55% dividend yield but there is some risk for investors to be aware of. The payout is more than even the adjusted earnings and may be cut or suspended at some point in the future. The mitigating factor here is that earnings are expected to improve later in the year and over the long term, and the company’s cash flows and cash balance are still strong. If the business deteriorates further we’d revisit the safety issue but don’t see it as a major hurdle yet. Competitor Schlumberger (NYSE: SLB), notable, cut its dividend in 2020 and is already back to increasing although the payout is still well below the pre-pandemic level.

Turning to the chart, price action in Baker Hughes fell to support near the $26 level during premarket trading and it may fall further. If the market can not hold the stock at $26 a move down to the $24 level is possible. Regardless, the stock appears to be overextended at these levels and ready to bottom. Assuming the market can hold the stock at $26, we see it moving sideways over the next few months until the next earnings cycle comes into play.