The energy sector has been struggling under the weight of volatile oil prices. The biggest issue for energy service providers like Baker Hughes, a GE Company (NYSE:BHGE) and Core Laboratories N.V. (NYSE:CLB) is that oil prices are hovering in a range that isn't high enough to support a robust, industry-wide uptick in capital spending, even noting the recent price jump related to the attack on Saudi Arabia's oil assets. Both of these companies are capably managing the headwinds, but one is definitely a better option than the other today, and that fact has little to do with oil prices. Here's what you need to know.

Getting better, but...

Baker Hughes' GAAP loss in the second quarter was $0.02 a share. However, taking out one-time items the company earned $0.20 a share. That figure was double what the company earned in the same quarter of 2018. Equally exciting, revenue was up 8% year over year and 7% sequentially from the first quarter. Orders, meanwhile, were up 9% over 2018 and 15% sequentially.

An offshore drilling rig

Image source: Getty Images

Looking past GAAP, those are pretty decent financial results, but what's particularly exciting to see is the uptick in orders driven by strength in international markets. That's a good omen for the future that could, perhaps, get even better from here if there's a lingering impact from the Saudi attack.

But management's continued success in integrating the oil and gas businesses of General Electric (NYSE:GE) into Baker Hughes is, perhaps, equally important. Last year the company was able to beat its synergy expectations by $100 million, and it remains on track to hit its cost saving targets for 2019. After a bumpy start, Baker Hughes appears to be getting its new, larger business heading in the right direction.

There's only one problem: Heavily leveraged GE remains a giant shareholder. After the complicated merger of these two companies, GE owned roughly 62.5% of the new Baker Huges. It sold that down to a little over 50% at the end of 2018, and the company recently announced it was selling more shares, reducing its ownership stake below 50%. That means that GE is no longer a controlling shareholder. It's an important development for Baker Hughes, which can finally chart its own course. But GE remains a major headwind, because it will still own roughly 38% of Baker Hughes' shares.

There are two reasons why this is a big deal. First, GE is selling Baker Hughes' shares from a position of weakness and at very low prices, suggesting it may be acting out of desperation. And, second, GE still has a lot more stock to sell. The most recent sale was roughly 115 million shares, with Baker Hughes' share price falling roughly 5% on the news. And there's a lot more shares to go before GE is out of the picture.

BHGE Chart

BHGE data by YCharts

Essentially, when GE sells Baker Hughes stock there has to be someone willing to buy it. With so many shares hitting the market, the additional shares put downward pressure on Baker Hughes stock price as they get absorbed into the market. That's likely to be a temporary thing, but in the near term it limits upside potential until GE is out of the picture. As long as it's entangled with struggling GE, Baker Hughes is probably best avoided by most investors. 

Working through a tough patch

Core Labs, meanwhile, earned $0.43 per share on a GAAP basis in the second quarter. Pulling out one-time items that figure was $0.46 per share, up about $0.02 sequentially from the first quarter but down from $0.59 per share in the previous year. That's a bit of a mixed picture, but hard to complain about given the market environment in which the company is operating.

What's interesting about Core Labs, however, is that it is working to control the things that it can control. That notably includes maximizing its return on invested capital (ROIC), which in the most recent quarter was in the low 20% space. This is, essentially, a measure of how well Core Labs is using its shareholders' money. A big piece of the story here is working to keep costs in check, which is exactly what you would expect management to do.

BHGE Return on Invested Capital (TTM) Chart

BHGE Return on Invested Capital (TTM) data by YCharts

The really big takeaway, though, is that Core Labs bests its peers by a wide margin when it comes to using shareholder capital. A lot of its services are software driven, so this isn't surprising. But still, its closest peer is below 10%, and Baker Hughes is hovering around the zero mark. And while earnings have been up and down, not surprising given the energy industry today, the energy services company has maintained its industry-leading ROIC at impressive levels for over a decade -- and a very difficult decade for its end customers.

Investors have soured on Core Labs this year, pushing its stock down around 20%, but it appears to be executing well despite difficult market conditions. Overall, that's a more compelling story than what Baker Hughes has to offer.

What to do?

The energy services sector is highly volatile, with shifting oil prices often leading to swift and dramatic swings in demand for the products and services that Baker Hughes and Core Labs have to offer. Most investors will probably sleep better at night avoiding both companies, even though they are successfully navigating the volatile oil price environment. All in all, a diversified oil major like ExxonMobil or Royal Dutch Shell would probably be a better option.

However, for more aggressive investors looking to own an energy services company, Core Labs and its industry-leading ROIC looks like a better choice today than Baker Hughes and its still-complicated relationship with GE.