Please ensure Javascript is enabled for purposes of website accessibility

Where Will Baker Hughes Be in 1 Year?

By Matthew DiLallo – Dec 3, 2018 at 5:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The oil-field service company might be independent once again.

The future of Baker Hughes, a GE Company (BKR -1.57%) has been up in the air for several years now. As oil prices began crashing in late 2014, Baker Hughes agreed to a tie-up with Halliburton only to see that deal fall apart less than two years later. That allowed industrial giant GE (GE 2.58%) to swoop in and merge its oil and gas business with Baker Hughes last year.

However, that relationship with GE quickly soured when the oil market didn't improve as soon as both companies expected, putting even more pressure on GE's finances given the problems it's been having with its power business. Baker Hughes could be back on its own a year from now.

Oil workers near some oil pumps

Image source: Getty Images.

Expediting the exit

GE completed the merger of its oil and gas services business with Baker Hughes in July of 2017. At the time, the deal created the second-largest oilfield services company by revenue. GE owned a 62.5% stake in the combined company and wasn't allowed to sell any shares until the middle of 2019.

However, a lot has changed at GE since then, which led it to take steps to jettison its position in Baker Hughes. Earlier this year, GE said that it planned to refocus its attention on its aviation, power, and renewable-energy businesses, and intended to sell off its position in Baker Hughes over the next two to three years. It would go on to accelerate that timetable in November, after Baker Hughes released GE from the stock-sale restriction. That enabled GE to sell 92 million shares in a public offering, while Baker Hughes agreed to repurchase another 65 million shares for $1.5 billion. Those transactions dropped GE's stake in the oilfield services company down to around 50%.

Lots of uncertainty in the coming year

GE can't sell any more shares of Baker Hughes for 180 days without the consent of the banks that helped it complete the secondary offering. However, it's clear that the company intends on unloading its remaining stake in Baker Hughes as quickly as it can. That could come through a series of additional public offerings over the next year, a sale of its remaining interest to another company or private equity fund, or a spin-off to investors.

The uncertain timing and method of GE's eventual exit will likely have an impact on Baker Hughes over the next year. It could harm the latter company's market position if competitors try to take advantage of its uncertain state and the problems at GE to steal customers unnerved by the situation. Those competitive pressures could impact Baker Hughes' ability to improve its oilfield services margin, which is among its priorities for 2019.

Another potential pressure point on profits is the recent slump in oil prices, which could impact oilfield-service activity levels in 2019. Initially, service companies thought that next year would be a much better one as oil companies reloaded their budgets based on higher oil prices. Instead, prices unexpectedly dropped back to where they were to start the year, which has some oil companies setting their budgets even lower than last year. So 2019 could be another tough year for Baker Hughes.

Likely independent and even further behind

The embattled GE will likely exit its position in Baker Hughes over the next year, turning Baker Hughes back into an independent company. However, given the uncertainty surrounding that eventual outcome, the company's market share could remain under pressure, because competitors are likely to try to exploit the situation. So Baker Hughes' stock could underperform its rivals in the next year, especially if GE unloads its position as quickly as it can (as opposed to timing its sale to market conditions). That's why the stock still doesn't look like a good one to buy right now.

Matthew DiLallo owns shares of General Electric. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.