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Why Baker Hughes Stock Jumped 18% in May

By Reuben Gregg Brewer – Jun 3, 2020 at 8:20AM

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Selling into the oil and natural gas sector has been tough, but it looked like things were continuing to improve in May.

What happened

Shares of energy services giant Baker Hughes (BKR -0.75%) rose 18%, according to data from S&P Global Market Intelligence. That followed a nice rally in April, with the stock up a hefty 57% over the two months combined. Unfortunately, it remained down roughly 35% through the first five months of the year.

As you might suspect, there's a bigger story playing out here.

So what

Baker Hughes provides products and services to the energy industry. It's one of the most diversified names in the space, selling into the upstream (drilling), midstream (pipeline), and downstream (chemicals and refining) sectors. Only oil prices have been trading near historic lows, helped along by excess oil piling up in storage following the plunge in demand related to COVID-19 containment efforts. In this environment, companies across the entire value chain have been pulling back hard. This will mean less business for Baker Hughes and, understandably, investors have punished the stock.

Oil rigs with the sun setting in the background.

Image source: Getty Images.

That said, there have been signs of improvement. After oil prices fell below zero, sending shockwaves through the global energy sector, the price of this often-volatile commodity has held up relatively well. In fact, it's been largely heading higher, with recent Brent crude prices in the $40 a barrel area. That's not a great price, to be sure, but it is much better than what we saw just a month or so ago.

The backdrop here is that economies around the world are reopening, production is declining, and all of the excess oil in storage is beginning to look like it will be a temporary problem. Investors have gone from scared to at least a little more positive, pushing the shares of Baker Hughes higher.

Now what

With the stock still down by roughly a third so far in 2020, investors clearly don't think Baker Hughes is out of the woods just yet. That's a fairly good estimation of the situation, since oil prices will need to mount a sustained rebound before oil companies really start to spend a lot of money again. So, there's improvement, but Baker Hughes is still facing material headwinds.

In fact, it's probably best to expect continued volatility here, since the global economy looks like it may fall into a recession because of COVID-19. That would cause yet another headwind for the recovery in oil demand and prices.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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