What Happened
Shares of Baker Hughes Company (BKR -1.00%) declined by just a touch more than 25% in February according to data from S&P Global Market Intelligence. That, however, was just a continuation of a trend: The broadly diversified energy services giant's stock fell a painful 37% through the first two months of the year. There's a very clear tie to COVID-19 here, but the story goes beyond that single issue.
Image source: Getty Images
So what
Toward the end of January, Baker Hughes reported earnings that showed it was continuing to make progress in its efforts to integrate its business with the energy services operations of General Electric. Financial results weren't great, but they weren't terrible either, with sales and revenue both up 1% for the year. That was actually a respectable showing, since oil and natural gas services businesses have been facing weak demand because of low commodity prices. The market didn't really care.
Demand for Baker Hughes products and services is highly reliant on oil prices, which have been relatively weak for some time. The escalation of COVID-19 in China at the start of the year led to immediate demand concerns in the energy sector because of that country's outsized role in the oil and natural gas markets. However, the expected impact was really second order in nature, since lower energy prices were expected to reduce demand for the types of services Baker Hughes provides to oil and gas drillers. In short, Baker Hughes shares started falling in January.
As the impact of COVID-19 started to become more clear in February, investors pulled back more broadly. And, as you would expect, Baker Hughes' decline accelerated. Baker Hughes, as noted, was down 37% in the first two months of the year, but the S&P 500 was only down by about 8%. The big decline in the S&P 500 Index didn't start to take shape until February.
Now what
There's no question that Baker Hughes is feeling the impact of coronavirus concerns. However, the hit started almost as soon as news of the virus started to gain widespread attention because of the potential impact on energy demand. At this point, even if China begins to recover, the global spread of COVID-19 suggests that energy demand will continue to face disruption concerns. Investors should be prepared for a bumpy ride no matter what happens with the broader indexes.
