Baker Hughes Company

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Baker Hughes is an energy technology company, providing products and services for oil and gas and energy technology clients.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Baker Hughes (BKR) operates in the complex and cyclical energy industry, offering a diversified portfolio of technologies and services. The company’s core operations span across multiple segments, with a primary focus on oilfield services and equipment, alongside an increasingly emphasized commitment to new energy frontiers.

Business Overview:

  • Revenue Distribution: BKR generates revenue through two primary segments:
    • Oilfield Services & Equipment (OFSE): This segment contributes the majority of revenue and includes products and services for drilling, well construction, completion, and production operations, targeting oil and gas extraction. They manufacture drilling systems, wellheads, pressure control equipment, and offer services like well logging and wireline.
    • Industrial & Energy Technology (IET): This newer segment generates more of its revenues from technology equipment and services that are applicable to multiple industries with a focus on new energy areas such as compression, power generation, industrial and process applications.
  • Industry Trends:
    • Energy Transition: There’s a visible industry-wide shift towards cleaner energy sources, impacting the strategies of energy-related companies. BKR is trying to adapt to this transition by actively investing in new energy technologies while maintaining their existing presence in oil and gas.
    • Market Consolidation: The oil and gas industry has seen several mergers and acquisitions, reflecting the need to adapt to the high competition in the market and achieve scale. BKR faces constant competitive pressures within the industry.
    • Geopolitical Factors: Unpredictability in commodity markets, supply chain disruptions, and geopolitical instability may have a material effect on BKR’s operations and financial performance. These conditions can also lead to greater volatility in the energy sector.
  • Competitive Landscape:
    • BKR’s competition varies based on the specific segment. They include large multinational competitors in both OFSE (like Halliburton and Schlumberger) and IET (like Siemens and GE). They also face competition from smaller specialized players in respective markets.
    • Within the OFSE market there is stiff competition on prices, as this part is relatively commodity.
    • IET has less competition on price, and the company competes on technology, and scale, etc.
  • What Makes BKR Different:
    • Dual Business Segments: One of BKR’s strategies that sets it apart from its competitors is its ability to capitalize on both the traditional oil and gas industry along with the evolving energy transition space through its two major business segments.
    • Technology Diversification: BKR boasts that it is technology-driven company by offering a diverse array of solutions in energy technology. They also focus on technology and innovation that helps improve profitability.
  • Moat Assessment:
    • BKR’s moat is mostly derived from their switching costs, brand reputation, and unique intellectual property.
    • They offer a complex suite of products and services that is difficult for companies to switch out from. This gives BKR a narrow moat that could be long-lasting.
    • Moat Rating: 3/5. The company’s moat is present but not very strong, being largely reliant on relationship management, and product offerings rather than proprietary technologies or a network effect.
  • Legitimate Moat Risks:
    • Commodity Price Volatility: Fluctuations in oil and gas prices directly impact demand and pricing for BKR’s services and products, potentially reducing margins and revenue.
    • Technological Disruption: The rapid pace of technological change in the energy sector exposes BKR to the risk of its solutions becoming obsolete or facing strong competition from newer, potentially more efficient technologies and solutions.
    • Economic Slowdowns - Periods of economic downturn may also cause a contraction in BKR’s revenue and margins, affecting earnings and impacting company performance.
    • Geopolitical Instability: Conflicts, sanctions, and geopolitical uncertainties have the capacity to disrupt operations, and impact supply chains, and create other business risks.

Recent Challenges: BKR has been working to streamline its operations in response to lower energy demand and has been working towards focusing its efforts on high-growth areas. They are also attempting to integrate their services and technologies to support the company’s goals, like decreasing cost structure and improving profitability.

Financials:

  • Recent Earnings: The 3rd quarter of 2023 showed a mixed bag for BKR, with the Oilfield Services & Equipment (OFSE) seeing revenue growth but declining margins, while Industrial & Energy Technology (IET) was able to boost earnings. Revenue for OFSE increased by 14% YoY, but operating income decreased by 20% YoY, primarily due to supply chain related price increases. On the other hand, revenue for IET was up 19% YoY, while operating income increased 34% YoY, primarily due to higher volumes, and higher pricing in certain parts.
  • Revenue: BKR’s revenue was $6.09B in the 3rd quarter of 2023 up by 8% YoY. The trend from the first three quarters of 2023 suggests growth is expected to be seen in revenue and profits from both the OFSE and IET segments.
  • Profitability: BKR has been showing improving profitability with a higher profit margin in both segments in Q3 of 2023. In the past years, BKR’s ROIC has been relatively volatile, as they are heavily affected by oil and gas prices and the macro environment. They are trying to improve their operating profit through better pricing, productivity and efficiency.
  • Cash Flow: BKR’s cash flow from operations remains strong, with 1.67B in Q3 2023. Management has been allocating this cash in capital expenditures, stock repurchases, and debt repayment. They have also been increasing investment in R&D.
  • Debt: BKR has a substantial amount of debt of ~$6B in long-term debt and $1.66B of short-term debt, however they have a healthy ability to pay back the debts.
  • Shareholder Value Creation: BKR has continued to repurchase stock and pay dividends to enhance shareholder value, and is continuing to explore and develop new product strategies and markets.
  • Balance Sheet Health: 4/5 - BKR is showing a somewhat healthy balance sheet with a decent amount of cash reserves, low debt relative to its assets, and a manageable debt-to-equity ratio. The company is financially well-managed but can be susceptible to large moves in capital requirements during economic contractions.

In past years, there have been some challenges with acquisitions that have underperformed, and significant restructuring charges. There have also been issues with earnings from operations that have been adjusted retroactively. As well there is reliance on estimates of revenue, prices, interest rates and other economic factors that may lead to a different outcome. The management has said they are committed to improving on these issues and providing better results.

Understandability: 2/5

  • BKR operates in a complicated industry with exposure to oil and gas production and a wide range of energy technology sectors. Due to this variety and complex product offerings, it can be difficult for an average investor to easily grasp BKR’s financial and competitive positioning. BKR’s business model involves deep expertise in technology, and that can be hard for an outsider to comprehend. Investors also need to have knowledge of financial statement analysis and forecasting to accurately evaluate BKR’s financials.