Baker Hughes Has Two Catalysts In Two Years (NASDAQ:BKR)

piola666 Baker Hughes Company (NASDAQ:BKR) is well-positioned for the energy future as the firm realizes strength and resiliency across their gas technology and LNG portfolios within their Industrial & Energy Technology Segment. These technologies are set to cater to the growing demand for natural gas on a global scale, as well as oilfield services & equipment as more precise D&C programs focus on enhancing the oil well’s production lifecycle. Management reconfirmed their margin enhancement strategy for 20% for both OFSE & IET by 2025 & 2026, respectively. Despite the global decline in rig utilization, Baker Hughes has found strength in their enhanced oil recovery and subsea & surface pressure systems. Given the improved operations and strong OFS market, I reiterate my BUY rating for BKR with a price target of $47.39/share at 10.33x eFY25 EV/aEBITDA. Corporate Reports Baker Hughes Operations Corporate Reports Baker Hughes is experiencing a modest decline in domestic production as a result of fewer land rigs being utilized. This has become a common theme across producers as operators focus more heavily on enhanced oil recovery rather than total wells drilled. Corporate Reports In addition to this, lower natural gas prices have added pressure to dry gas production, which has resulted in fewer rigs deployed across the Haynesville and Marcellus Basins. On the domestic front, US rigs are down while Canadian rigs are up, suggesting that interest in drilling programs has likely pivoted more into the Alberta-Montney Basin. economicdashboard.alberta.ca What caught me by surprise in Baker Hughes’ reported rig count was the decline in rigs in the Permian Basin. Many producers in the region, including Exxon Mobil (XOM), Devon Energy (DVN), and Chevron (CVX) have been focusing their attention on the basin. The drop in rigs in part does make sense given the enhanced drilling and recovery programs set in place by these firms, suggesting that the producers can generate a similar flow with fewer wells drilled. Corporate Reports This has led to Baker Hughes refocusing on other revenue-generating segments, primarily in gas tech and LNG. In the Q2 ’24 earnings call, management outlined multiple major projects relating to their gas technology segment that is driving growth. In total, projects booked in the IET segment in Q2 ’24 sums to $3.5b. This includes $1b of equipment bookings from the Master Gas System with Aramco and the Hassi R’Mel pipeline expansion project in Algeria that is designed to bring gas to Europe. The $6.4b gas tech in orders booked throughout the entire 1h24 were non-LNG equipment and services, suggesting that more international producers are seeking to develop their gas processing and transport infrastructure. Management anticipates gas tech excluding LNG to bring a total value of $100-120b through 2030. As it pertains to the gas tech subsegment, management forecasts LNG demand to increase in the mid-single digits annually through the end of the decade, with installed nameplate capacity reaching 800MTPA by 2030. Management also anticipates global LNG FID of 100MTPA over the next three years. One of the benefits that the LNG market brings to Baker Hughes over the long run is that the firm is positioned to service the facilities with aftermarket services and operations. Corporate Reports Management anticipates gas demand to grow at a 20% growth rate through 2040, which, I believe, will be supplied by LNG trade. As of q2’24, 51.6MTPA were under firm contract, with an additional 20.2MTPA being negotiated. Given that contract duration is in the range of 10–20 years, this provides Baker Hughes with significant visibility into the growing demand for LNG services and an outlook of the aftermarket services market. Corporate Reports Management anticipates most of the onshore & offshore markets will be led by the FPSO market throughout the upcoming years. This is expected to be led by investments in Latin America, where large offshore projects are being developed off the coast of Brazil and Guyana. In addition to LATAM, management anticipates upstream growth to be driven by production in West Africa offshore and the Middle East. Offshore activity in the Gulf of Mexico is expected to remain strong as well, with companies like Chevron and Occidental Petroleum (OXY) focusing their attention on these assets. TradingEconomics One of the biggest risks is the decline in oil prices. WTI is hovering sub-$70/bbl, while Brent is just north of $70/bbl. Analysts believe the driving factor behind softer oil prices is the decline in demand coming out of China. August oil imports in China are off by 7% on a year-over-year basis. Though it may not be a risk to offshore as much as onshore, a further decline in prices could potentially lead to delays (not cuts) in offshore drilling. The softer oil prices are likely the rationale behind the fewer land rigs in the US. Contrary to the US rig decline, Canadian rigs are up. This factor is likely driven by the completion of the Trans Mountain Pipeline expansion in May 2024, allowing stronger production rates without the need for pipeline rationing. Baker Hughes Financials Corporate Reports Forecasting through eFY25, I anticipate Baker Hughes to generate $4.5b in adjusted EBITDA for eFY24 and $4.9b in eFY25. This will be driven by the operational enhancements management is setting in place that is driven by cost-cutting measures to eliminate overlap and redundancies. Management’s initiative is to drive EBITDA margin expansion across their OFSE & IET segments to 20% in 2025 & 2026, respectively. In IET, this includes supply chain optimization and realizing an uplift as a result of streamlined activities and modernization of management systems. In addition to this, Baker Hughes also has some high margin backlog coming into play that will drive margin improvement for IET. TradingEconomics One factor that may drive additional cost reductions is the price of steel. Corporate Reports I believe that this will drive significant cash generation in each segment, with OFSE generating $2.8b and IET bringing in $1.9b in EBITDA in eFY24. For eFY25 at a 20% EBITDA margin, I forecast OFSE to generate $3.2b in EBITDA. Risks Associated With Baker Hughes Bull Case Baker Hughes is going through a major organizational optimization initiative that can improve margins and efficiencies. This will drive the company’s ability to generate cash and return more to shareholders as part of their 60-80% shareholder return target. I have reason to believe that each incremental performance metric reached will drive price appreciation as the firm nears its 20% target for OFSE & IET in 2025 & 2026. The company’s stock is highly correlated with the price of WTI; if oil prices (CL1:COM) were to appreciate from their current level, BKR shares are likely to follow suit. Bear Case Oil prices have declined significantly throughout 2024 and have priced sub-$70/bbl WTI. This has resulted in a decline in the company’s share price as a result of the high correlation coefficient. If low oil prices persist, BKR share returns may underperform the broader market. Given the 20% EBITDA margin milestones management has laid out, if the company does not achieve their 2025 goal of 20% OFSE EBITDA margin, shares will likely sell off. Valuation & Shareholder Value Corporate Reports Baker Hughes currently trades at 8.91x TTM EV/aEBITDA. The firm returned $375mm to shareholders in Q2 ’24 through their dividend and share repurchase program. Management intends on returning 60-80% of free cash flow to shareholders, with incremental improvements in the dividend rate paired with share buybacks to reach their target allocation range. Looking at company comparisons, Baker Hughes trades at a relative premium to its peers, on an unadjusted basis. Seeking Alpha I believe this premium is justified given the management’s drive for operational efficiency and growth across gas tech and other operational segments. Using an internal model based on my forecast for eFY25 aEBITDA generations based on historical trading multiples, I believe BKR shares have significant room for expansion in the coming years. I believe share growth will be driven by milestones set by management, including their drive for 20% margins in OFSE and IET. Given these factors, I reiterate my BUY rating for BKR shares with a price target of $47.39/share at 10.33x eFY25 EV/aEBITDA. Corporate Reports BKR shares have outperformed the S&P 500 (SP500) since 2021 by 54% to date. Though historical price dispersion should not be used as an indicator for future performance, especially when considering the trajectory of oil prices since 2020, I believe Baker Hughes is well-positioned for continued growth. This is through various nodes outside of hydrocarbons, including electrification and turbines for small modular reactors. I anticipate SMR technology to become accretive towards the back end of the decade as new nuclear power facilities begin the engineering and construction process. Power transmission will likely be driven by data centers, which management has outlined as offtaking 4% of electricity, equivalent to the demand for all of Japan. I believe natural gas will supply most of the power during the duration of the 2020s, with dedicated nuclear capacity taking over in the 2030s. Either stream should benefit Baker Hughes eventually.

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