Shares of Baker Hughes, a GE Company (BKR -0.66%) seem to be on a never-ending slide. They're down 35% in the past year and almost 70% over the last half-decade. That's due in large part to the continued weakness in the oil market as crude prices have been on an uneven recovery.
That slump likely has investors wondering if Baker Hughes is now a screaming bargain or still a value trap. Here's a look at the cases for and against buying shares of the oil-field service company.
The bull case for Baker Hughes
After several challenging years, Baker Hughes' financial results are starting to improve. In the second quarter, revenue rose 7% sequentially and 8% year over year. Meanwhile, adjusted earnings surged 37% from the first quarter and doubled versus the year-ago period. On top of that, the company generated more than $350 million in free cash flow, which is a notable improvement for a business that had been consuming cash.
The company also hinted that even better days could be ahead. Product and equipment orders, for example, increased 15% from the first quarter and 9% year over year, which implies that revenue should continue growing. One of the highlights was a 32% year-over-year uptick in orders in the turbomachinery and process solutions business, which supplies equipment to the LNG industry. That trend appears poised to continue, according to comments by CEO Lorenzo Simonelli in the earnings press release. He noted that management is "encouraged by strengthening international markets and the strong LNG project pipeline."
The company has since started work on one of the opportunities in its LNG pipeline after Venture Global recently approved its Calcasieu Pass project, in Louisiana. As a result, Baker Hughes has started building some of the equipment for this new facility. With several more LNG projects moving toward approval, revenue and orders from this segment should continue growing.
Likewise, the offshore market is starting to bounce back. As the industry builds new offshore production platforms, Baker Hughes' oil-field equipment business should see improvement. That business has been under some pressure as sales slipped 6% sequentially during the second quarter, while orders tumbled 19% during that time frame and 40% year over year.
The bear case for Baker Hughes
While the international, offshore, and LNG segments of the energy industry are improving, the North American onshore market has weakened considerably over the past year. That's because crude prices in the U.S. have fallen about 20%, including a 5.5% decline during the second quarter. This slump has caused oil producers to tap the brakes on the drilling programs, which is evident in the U.S. rig count's 5% decline during the quarter. That's putting some pressure on the company's oil-field service and oil-field equipment businesses.
If oil prices continue to weaken, it will likely cause drillers in the U.S. to reduce spending further, which will keep the pressure on those two business segments. However, given its focus on international and LNG, this slowdown won't have as much of an impact on Baker Hughes as it will on companies, such as Halliburton (HAL 3.03%), more focused on the North American market. Halliburton had to cut 8% of its North American workforce and idle some equipment to improve profitability.
Another potential issue that could weigh on Baker Hughes' recovery is its relationship with GE (GE 4.70%). The industrial giant still owns a sizable stake in Baker Hughes, which it plans to sell off to help pay down debt. Those future sales could put pressure on Baker Hughes' stock price if GE sells too much stock at once. There are other ways in which the relationship has added to Baker Hughes' volatility. A recent report alleging that GE committed accounting fraud weighed on shares of both GE and Baker Hughes. It wasn't the first time that issues at GE caused shares of Baker Hughes to slump, and the relationship remains a risk until GE exits its position.
Verdict: Baker Hughes isn't a buy
There are lots of positive developments that could drive shares of Baker Hughes higher in the coming years. The uptick of offshore and LNG project approvals should boost orders in the near term and lift revenue over the next few years. Baker Hughes could outperform North American-focused oil-field service companies like Halliburton.
However, continued oil price volatility will likely weigh on the company since it has some exposure to the North American market. On top of that, GE's ownership stake in Baker Hughes is a potential issue. Those factors make it less likely that Baker Hughes stock will outperform the S&P 500, which is why it doesn't seem to be worth buying right now.