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Here's Why the Stock of Baker Hughes, a GE Company, Rallied in September

By Matthew DiLallo - Oct 9, 2017 at 11:04AM

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Higher oil prices helped offset lukewarm analysts.

What happened

Shares of Baker Hughes (BKR -2.56%) rose sharply in September, ending the month up 6.5%. That's after the recently minted subsidiary of General Electric (GE -0.03%) benefited from rising oil prices, which implies that better days lie ahead for the oil-field service company. That renewed optimism helped offset a lukewarm reception from the analyst community.

So what

The U.S. oil price benchmark, WTI, catapulted 7.7% last month to close at $51.67 per barrel. That pushed crude into bull market territory, capping a more than 20% comeback from its bottom in June, fueled by accelerating oil demand and tepid supply growth after shale drillers tapped on the brakes. The rally suggests that drillers won't need to cut much deeper into their drilling budgets, which should enable Baker Hughes and rivals Schlumberger (SLB -1.16%) and Halliburton (HAL -2.55%) to continue pushing through price increases and boost profitability.

An oil field at sunset.

Image source: Getty Images.

Despite the improvement in oil prices last month, though, analysts weren't yet sure what to make of the company created by merging GE's oil and gas business with Baker Hughes. Evercore ISI, on the one hand, thought that two recent contract wins suggested that the GE/Baker Hughes tie-up had created a fully integrated behemoth that could compete and win against Schlumberger and Halliburton.

That said, others like FBR said that the new Baker Hughes was in "show-me" mode for the next couple of quarters while it proved that it could capture the anticipated deal synergies. Meanwhile, BofA Merrill Lynch initiated the stock with an underperform rating and a $36 price target. One of the drivers of that downbeat view is valuation. The bank believes that Baker Hughes should trade at a discount to Schlumberger given that the oil services giant has a proven ability to deliver higher margins and that it should sell for a multiple more in line with Halliburton since it has a stronger balance sheet but a weaker North American market position.

Now what

While Baker Hughes' stock rose last month, it could just be getting started. That's because uncertainty about the direction of industry activity levels and its recent tie-up with GE are still weighing on the market's view of the company. However, as oil continues to stabilize and the GE deal synergies materialize, it should enable investors to see the earnings power of the combined company in an improving market environment, which could send the stock skyward in the coming years.

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Stocks Mentioned

Baker Hughes, a GE company Stock Quote
Baker Hughes, a GE company
BKR
$28.87 (-2.56%) $0.76
General Electric Company Stock Quote
General Electric Company
GE
$63.67 (-0.03%) $0.02
Schlumberger Limited Stock Quote
Schlumberger Limited
SLB
$35.76 (-1.16%) $0.42
Halliburton Company Stock Quote
Halliburton Company
HAL
$31.36 (-2.55%) $0.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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