Baker Hughes betting on the beneficiary of the fuel crisis
Baker Hughes (BKR) is one of the largest oilfield services companies in the world, supplying equipment to oil and gas and energy companies, providing related services, and offering digital solutions for field development and production management. The issuer’s business is well diversified geographically: The United States accounts for 22% of revenue, China and Japan — for 18% and 5.9%, respectively, and each of the other countries of presence accounts for less than 5% of BKR’s revenue. In our opinion, Baker Hughes shares have a good growth potential on the year horizon for the following reasons. Recovery of drilling activity in the world and increase in LNG production.
Global drilling activity has been growing since the beginning of the year. The number of active installations increased by 212 units or 13.6%. According to the US Department of Energy forecast, the average level of production of liquid hydrocarbons in the world this year will rise by 5%, to 100.3 million barrels per day (MBS). In 2023, the indicator will add another 1.2%, increasing to 101.6 MBS. The increase in gas production in the United States to be 2.9% and 3.9% in 2022 and 2023, respectively. Increasing the output of carbon hydrogen will require increased investment and will improve the financial performance of oilfield service companies. We expect BKR’s revenue to grow by 1.2% and 5.6% this year and next, respectively.
The development of LNG projects will also facilitate it. BKR has received contracts for the supply of seven medium-tonnage LNG lines for Cheniere’s Corpus Christi plant, as well as two central refrigerant turbochargers for New Fortress Energy. The last company will use Baker Hughes technology in various offshore projects worldwide. The issuer has also signed an agreement with Samsung Engineering to supply 14 compressors to ensure gas processing for the Saudi Aramco project. The company has other signed contracts. According to management’s expectations, over the next two years, they will make decisions on constructing LNG plants with a total capacity of 100 – 150 million tons per year. In 2022, BKR plans to receive orders from the LNG industry for $8-9 billion. The end of the sale of the issuer’s shares by General Electric (GE). In the summer of 2020, the American industrial giant General Electric decided to withdraw from the capital of BKR.
The share at the end of the second quarter of 2020 was 36.5% of the total number of issued shares or 377 million units. The plan implied the sale of securities on the open market for three years. Baker Hughes management launched the bay back program in 2021. As of the end of the second quarter of 2022, the volume of repurchases amounted to $900 million, and the number of shares on GE’s balance sheet fell to 7 million, or $170 million, at current prices. In our opinion, GE will complete the sale of securities in the third quarter of 2022, relieving pressure on BKR quotes.
After the end of the sales, Baker Hughes can direct the funds previously allocated to buyback to reduce the debt burden and increase dividend payments. High dividend yield and low debt burden. According to the second quarter’s results, Baker Hughes management maintained the quarterly dividend at $0.18 (the cut-off took place on August 8, and the payment for August 19) with a 3% per annum to current quotes. The average for BKR’s most prominent competitors is 1.23%. At the same time, the ratio of the company’s net debt to the forecast EBITDA of 2022 is only 1.3x, which excludes a reduction in dividend payments in the foreseeable future.
