Baker Hughes (BKR) 22Q4 Update

On Jan. 23, BKR reported 22Q4 GAAP EPS of $0.18 vs. $0.32 a year ago and my estimate of $0.29.  Non-GAAP EPS was $0.38 compared with $0.25 last year and my estimate of $0.41.  Revenues of $5.9 billion increased 7.7% vs. 21Q4 and were in line with my estimates.

The shortfall in both GAAP earnings vs. my projections was due mostly to losses recorded on investments, including BKR’s equity stake in C3.AI (AI) and a much higher tax rate, which more than offset higher-than-anticipated operating income, due to lower SG&A costs.

Orders of $8 billion were strong in the quarter, up 32% sequentially and up 20% YOY.  Like its two major peers—HAL and SLB—BKR believes that a new upcycle for oil & gas investment has begun and demand for its services will remain strong for some time, as infrastructure spending has been insufficient in recent years to meet the growth in demand.

This seems quite likely long-term; but in the short-term, the company and its peers may have to contend with fallout from recent declines in U.S. crude oil and natural gas prices.  At current levels, crude oil prices are still supportive of the current pace of production. But U.S. natural gas has fallen 75% from its mid-August peak of $10 per million BTUs, which will likely curtail drilling and production activity until prices rebound. (Natural gas prices could get a boost from a pick-up in exports when the Freeport LNG liquefaction facility resumes operations perhaps in a few weeks.)  BKR management also believes that the reopening of China and Europe’s need to refill gas storage at the end of the winter will keep global natural gas and LNG markets tight.  However, warmer than normal temperatures in both the U.S. and Europe has reduced uptake so far this winter, leaving inventory levels well above their five-year averages.

Despite the uncertainty caused by lower commodity prices, BKR’s orders surged in its Industrial and Energy Technology segment in the quarter from multiple contract awards in both LNG and Onshore/Offshore Production.  Its guidance anticipates that strong demand will persist in 2023.  IET orders are expected to be $10.5-$11.5 billion in 2023, down 6%-15% vs. 2022, but above the 5-year average of $9.9 billion. 

Under new CEO Nancy Buese, BKR has initiated earnings guidance for 23Q1 and all of 2023.  It expects full year total revenue of $24-$26 billion, up 13%-23% from 2022; adjusted EBITDA of $3.6-$3.8 billion, up 20%-25%; corporate costs of $370 million, down 11%; and an adjusted effective tax rate of 35%-40%, compared with 2022’s 42.2%.

Based upon that guidance, I project that BKR will deliver 2023 GAAP EPS of $1.14 per share, compared with 2022’s loss of $0.61; and non-GAAP EPS of $1.56, up from $0.91 in 2022.  For 2024, my projections anticipate a slower rate of growth with revenues up 11%, GAAP EPS of $1.43 and non-GAAP EPS of $1.85.  My projections are below the average of analysts’ estimates and at the low end of the range for 2024.

At the current price of $31.37, BKR shares are valued at 27.4 times my 2023 GAAP estimate and 20.2 times my 2023 non-GAAP estimate, both well above current market averages.

To set the target price, I have applied a forward valuation multiple of 18.0 (below the current one-year forward multiple of 20.2) to projected 2024 Non-GAAP earnings of $1.85.

My decision to use a lower forward multiple presumes that BKR’s growth prospects will diminish somewhat beyond 2024 (but still remain above average vs. the global economy).

My lower forward P/E multiple assumption produces a target price of $33.  At the current price of $31.41 and with the stock’s 2.4% dividend yield, the potential 12-month total return is about 7.5%, which merits a rating of “3” (Neutral).

Energy stocks have had two consecutive years of exceptionally strong double-digit gains.  BKR participated in that recovery with total returns of 19.0% in 2021 and 26.8% in 2022.  After such strong gains, the sector and BKR’s stock may be vulnerable to a correction, unless commodity prices rebound in the near future.

February 8, 2023

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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