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Why Baker Hughes Stock Plummeted 40% in the First Half of 2020

By Reuben Gregg Brewer - Jul 6, 2020 at 11:41AM

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Baker Hughes stock has actually recovered from the worst of its downturn, which hints at just how bad things really are.

What happened

Shares of Baker Hughes (BKR 1.63%) lost a massive 40% of their value through the first six months of 2020, according to data from S&P Global Market Intelligence. That number, however, is actually an improvement. At one point in the span, the oil services company's stock had lost roughly two-thirds of its value. 

So what

The big issue is oil demand. When COVID-19 started to work its way around the globe, countries effectively shut their economies to slow its spread. Demand for oil, logically, plummeted. The supply/demand dynamic was already tilted a little too far toward supply when 2020 began. So when demand fell off a cliff, energy markets were suddenly massively oversupplied and oil prices fell sharply. In fact, oil prices briefly fell below zero -- effectively meaning that oil drillers were paying customers to take their oil. 

Oil rigs with the sun setting in the background

Image source: Getty Images.

When oil prices are low, the energy sector reacts in a fairly predictable way -- drillers pull back on capital spending. That means less business for companies like Baker Hughes. To provide an idea of how bad the situation was, one-time charges pushed the company to a loss of $15.64 per share in the first quarter. And Baker Hughes' highly watched monthly rig count tally shows that the number of rigs operating globally was off by more than 50% year over year in June. The industry downturn is bad, and energy services companies like Baker Hughes are taking a big hit.    

Now what

Excess oil has been piling up in storage and needs to be worked off before oil prices can mount a sustained recovery. Meanwhile, the economic reopening process will dictate how much oil is needed. That, in turn, will depend at least partially on the path COVID-19 takes. There are a lot of moving parts, and Baker Hughes doesn't have much control over what's going on. This is not an appropriate stock for conservative investors today, since COVID-19 cases are increasing again in key energy markets like China and the United States.

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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Baker Hughes, a GE company Stock Quote
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