Oil is back! Or, at least that appears to be the attitude on Wall Street. So far this year, the Dow Jones US Select Oil Equipment & Services Index is up 34% compared to a 22% decline for the S&P 500. After years of little investment in the oil patch, higher oil prices are slowly leading to increased capital spending budgets. That should benefit services companies immensely in the coming years. One company that stands out in the industry is Baker Hughes (BKR 1.33%). Its stock is wildly underperforming the sector so far this year. 

Is the market forgetting about the world's third-largest oilfield services company, or is there perhaps something more to the story? Let's take a closer look at the oil services company to see if Wall Street is wrong and Baker Hughes' stock is a buy today. 

The proposition

Baker Hughes has a lot to like about it, and the thesis for buying it is solid. It is a storied business in the oil patch that got its start over 100 years ago making drill bits. For decades it has been acquiring and consolidating parts of the oilfield services industry to become the third-largest equipment and services provider behind Schlumberger (SLB 0.35%) and Halliburton (HAL 1.12%)

The current iteration of Baker Hughes has expanded well beyond the oil patch, though. Through acquisitions and the 2017 merger with General Electric's (GE -0.76%) oilfield equipment business, the company has a significant presence building equipment for liquefied natural gas (LNG) facilities, gas and steam turbines for electric generation, compression equipment for pipelines, and various aftermarket sales and services for oil and gas, electric, and nuclear power customers. These are all businesses expected to grow alongside an expected increase in capital spending in the oil and gas industry.

Management thinks that its expertise in a wider field of operations should allow it to compete in several emerging energy trends as well. Management believes its experience in drilling should translate well to geothermal energy, and carbon capture and storage. Also, its experience in machinery and compression should lend itself well to the transition to hydrogen as a fuel source. It expects that long term, its oilfield business will remain a higher-margin cash engine while its other business lines have the opportunity to double revenue to over $16 billion between now and 2030.

What is perhaps equally impressive is management's expectations for profitability and shareholder returns. After its most recent restructuring, management says it has cut out about $150 million in overhead expenses and expects more cost savings in the future. It expects that between fiscal years 2024 and 2025, it will be able to improve its return on invested capital to over 15% across the entire portfolio and return significant cash to shareholders in the form of dividends and buybacks. It has already done some of this with over $8 billion in dividends and buybacks cumulatively since 2018.

All in all, this sounds like a solid thesis -- an established business with some significant growth catalysts and a management team with an eye to profitability and shareholder returns. 

The difference between on-paper and performance

The thing that should give investors pause when looking at Baker Hughes is that the many iterations of the company over many years have made similar promises, only to not deliver returns for investors. Over the past 35 years, an investment in Baker Hughes has only generated a total return of 40%, a fraction of the returns of its largest competitors.

BKR Total Return Price Chart

BKR Total Return Price data by YCharts

This isn't the first time we have heard lofty projections from management, either. When it merged with GE's oilfield equipment business, it talked about $1.6 billion in cost and revenue synergies and a free cash flow conversion rate -- typically measured as a percentage of operating profit -- of over 90%. Neither of these things materialized.

Perhaps even more discouraging are the claims of shareholder returns. Management says it has returned $8 billion to shareholders, but $1.2 billion of that was paid directly to General Electric. What's more, the company's total outstanding shares have skyrocketed in recent years as GE unwinds its equity investment in the company and management stock rewards. Sure, it's paid a dividend, but it hasn't been enough to generate a significant return for the company. 

BKR Average Diluted Shares Outstanding (Quarterly) Chart

BKR Average Diluted Shares Outstanding (Quarterly) data by YCharts

What do you believe?

Buying Baker Hughes today is a bet that it will be able to shed its poor track record for shareholder returns and become what management says it will. That means becoming a high-return business while simultaneously investing in multiple high-growth catalysts while returning significant cash to investors. In its decades of operation, multiple management teams, and several corporate restructurings; it has never been able to achieve those goals. So you're banking on this management team accomplishing something for which it doesn't have a track record. 

You can never rule out the possibility of it happening, but history is not on its side. For investors that are interested in buying stocks in the oilfield services business, it would be best to look at some of Baker Hughes' competitors until it can show tangible results resembling management's lofty projections.