Despite a slowing economy, the relatively high price of oil has persisted. As a result, properly diversified investors will undoubtedly include some energy stocks in their portfolios. One strong candidate for inclusion is oilfield services and equipment company Baker Hughes (BKR 0.28%). Here's why the stock is a buy right now.
The investment case for Baker Hughes stock
There are four key reasons to buy the stock:
- The recent results and guidance confirm the company is well on track to, at the least, achieve its 2023 guidance.
- Management is making good progress with its self-help initiatives to take out $150 million in annual costs by the end of 2023.
- The ongoing strength in energy prices encourages a multiyear oil & gas investment expansion, and Baker Hughes is a key beneficiary.
- The company is well positioned in key growth areas, such as its new energy and LNG solutions.
These reasons received support from the recent results, and it adds up to make the stock attractive for investors.
Baker Hughes results and guidance
The first-quarter revenue of $5.7 billion came in at the high end of guidance of $5.3 billion to $5.7 billion, while adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) of $782 million was ahead of the guidance range of $700 million to $760 million.
Consequently, while management didn't raise its full-year guidance, CFO Nancy Buese told investors on the recent earnings call:
With the strong performance in the first quarter and positive outlook for the second quarter, we now believe that adjusted EBITDA is trending between the midpoint and the upper end of the guidance range of $3.6 billion to $3.8 billion.
Self-help initiatives
Following some patchy performance, management restructured the business by combining its oilfield services and oilfield equipment businesses into one segment, oilfield services and equipment (OFSE). In addition, the turbomachinery and process solutions and digital solutions businesses became the industrial energy and technology (IET) segment.
In accordance with the changes, management plans to reduce management layers, simplify the businesses, and generate cost savings through the business combination. As such, the plan is to reduce costs by $150 million in 2023, with $60 million coming from OFSE, $50 million from IET, and $40 million from corporate functions (simplifying the corporate structure).
The good news here is that, according to Buese on the earnings call, management expects "all actions necessary to achieve these savings to be completed by the end of the second quarter." She held out the prospect of exceeding the target by the end of 2023: "Based on progress to date and areas of opportunity that we have found, we have [a] good line of sight to exceeding our initial $150 million target."
While Buese isn't ready to quantify the additional cost savings, she plans "to have all the work completed on any additional restructuring by the end of the second quarter," so don't be surprised if management upgrades its full-year cost-out target on the next earnings call -- something to look out for.
Image source: Getty Images.
Underlying growth, LNG, and new energy
CEO Lorenzo Simonelli believes the near-term outlook in oil remains positive and that "the case for a multi-decade growth opportunity in gas is steadily improving." He has good reason for his confidence, which is backed up by the 12% increase in orders in Q1 to $7.6 billion.
Despite a slowing global economy overall, the economy of China (a country often seen as the swing factor in commodities demand) is recovering from self-imposed lockdowns. Meanwhile, oil majors are being disciplined regarding capital spending and maintaining strong balance sheets, lending credence to the idea that the industry is headed for a multiyear expansion. And finally, recent actions by Saudi Arabia and other OPEC countries to curtail production support higher oil prices.
As for natural gas and LNG specifically, Simonelli sees "a pipeline of new international opportunities expanding project visibility out to 2026 and beyond." Of the $7.6 billion in orders reported in Q1, $1.4 billion was from LNG. Meanwhile, "new energy" orders (including hydrogen, CO2 compression, and carbon capture, utilization, and storage) totaled $300 million in Q1 compared to $400 million in 2022.
Simonelli expects "new energy" orders to comprise around 10% of its gas-technology orders over the next "three to four years."
A stock to buy
All told, Baker Hughes is making good progress on its initiatives; industry-spending conditions remain positive; and new energy orders are starting to flow, encouraged by the implementation of the Inflation Reduction Act. It all adds up to making it one of the best plays in the energy sector.
