The worldwide effort to contain COVID-19 by effectively shutting down broad swaths of the global economy has devastated the energy industry. Vital energy services providers Baker Hughes (BKR +0.99%) and Core Laboratories (CLB +0.00%) are down 44% and 54%, respectively, so far in 2020. Is one of these two companies a better buy than the other? Here's a quick comparison to help you decide.
1. Oil prices matter
Although neither Baker Hughes nor Core Labs is directly reliant on energy prices for their top and bottom lines, that doesn't mean there's no impact. Both companies provide services to the energy sector. When oil and natural gas prices are low, exploration and production companies tend to pull back on their capital investment plans. That basically means less demand for the products and services that Baker Hughes and Core Labs offer.
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To put some numbers on that, Baker Hughes' bottom line in the second quarter of 2020 came in at a loss of $0.05 a share, well below the adjusted earnings of $0.20 per share earned in the same period of 2019. The big difference between the two comparable periods is that energy prices have nosedived, and the company's customers have sharply pulled back their spending plans.
Core Labs hasn't fared much better. Its adjusted earnings fell from $0.46 per share in the second quarter of 2019 to just $0.14 in the same period of 2020. The financial results of both of these companies will remain under pressure until demand for their services starts to pick up again. That isn't unlikely to happen until oil prices sustainably improve and give oil drillers the confidence to start spending again.
2. Foundations
That said, neither Core Labs nor Baker Hughes is new to the energy business. They understand that it is a highly cyclical sector prone to painful lows and exuberant highs. Today is a low, with oil falling below zero at one point earlier in 2020. That's clearly not a sustainable price, and it has since recovered, but it shows just how difficult the market is today.
So it is a good thing that Core Labs and Baker Hughes have fairly reasonable financial debt to equity ratios of around 0.33 times today. Moreover, both have reasonable current ratios (which measure a company's ability to pay near-term bills) of 1.9 times and 1.4 times, respectively. Both are highly likely to muddle through this downturn, even if it isn't a fun ride, just as they have managed to survive industry headwinds in the past.
BKR Financial Debt to Equity (Quarterly) data by YCharts
3. Different models
With that background, it's important to understand that Baker Hughes and Core Labs have vastly different approaches in the energy services space. Baker Hughes is a jack of all trades, offering products and services that span from the midstream arena to the drilling sector. Not surprisingly, it is a giant company, with a roughly-$14 billion market cap. Core Labs is a specialist, providing reservoir enhancement services via largely digital products. It has a market cap of just $750 million or so.
Don't judge it by its size alone, though -- it is a vital industry player providing very important products. However, it simply doesn't reach as far into the industry as Baker Hughes. You know that diversification is good for your portfolio, but it can be just as beneficial for a company's business over the long term. For more conservative types, Baker Hughes has an edge here.
4. Dividends
Dividends are another major differentiator right now. Baker Hughes pays a quarterly dividend of $0.18 per share. It has paid at that same level since the last quarter of 2017. Although earnings today are being pinched by the industry downturn, management clearly believes in returning value to shareholders via a consistent dividend in good times and bad. Baker Hughes' yield is currently around 4.7%.
Core Labs, on the other hand, cut its dividend to a token penny per share in April. That decision will help the company's liquidity position during this difficult period, but dividend investors will clearly be displeased with this decision. If you are looking for a dividend stock, Baker Hughes appears to be the better option right now.
BKR Dividend Per Share (Quarterly) data by YCharts
5. A complex twist
Larger, more diversified, at least as financially strong, and dividend paying -- so far Baker Hughes probably has the edge in this comparison. But there's one small problem: As of June, General Electric owns around 36.5% of Baker Hughes stock, which is a residual from a merger of the two companies' energy businesses a few years ago. General Electric is working through a long and difficult turnaround, and has openly stated it plans to sell its Baker Hughes stock to raise cash.
But there's no particular time frame attached to that plan, so there's a large overhang on Baker Hughes' shares. A rise in the stock price could lead to GE selling shares, and that, in turn, could suppress the share price. Basically, Baker Hughes isn't a clean win.
The outlook is hazy, at best
Investors looking for out-of-favor energy stocks will probably find both Baker Hughes and Core Labs of interest. In fact, neither is a particularly bad company, though both require an oil upturn before their businesses will start to thrive again. With that in mind, and the continued COVID-19 headwinds, more conservative types might want to stay on the sidelines here until the supply/demand imbalance in the energy space starts to show more material signs of improvement.
If you are willing to jump in early, however, Baker Hughes probably comes out ahead because of its more diversified business and still-worthwhile dividend payout. You'll just want to keep the relationship with GE in mind, as it's an added complication that could potentially limit the upside here for a while.
