Stock Watch
Baker Hughes: Drilling for Growth
Big oil companies get the big headlines, but shares of this oil-services company could offer more opportunity now.
March 9, 2005
High oil prices mean energy stocks have received a lot of attention from investors over the past several months. Integrated oil companies such ExxonMobil (XOM) continue to grab headlines. And Exxon's stock has performed well, with shares reaching all-time highs in February.
Big oil companies are still a good idea, especially for the dividends. But if you want better growth opportunities, look at their suppliers, such as diversified oil-services companies. Among the stalwarts is Baker Hughes (BHI). Its stock is up by double-digit percentages since last summer, but plenty of opportunity remains.
Baker Hughes provides services and technologies that help oil and gas companies find, develop and maintain reservoirs. Among its products are drill bits, drilling fluids and submersible pumps.
Major energy companies are so flush with cash that, even after setting aside billions to raise dividends and repurchase stock, they have near-bottomless budgets for rigs, pumps, and other products and services. In fact, ExxonMobil announced Wednesday that its capital spending should rise to about $15 billion to $16 billion this year, and to $16 billion to $17 billion in 2006, according to a Reuters report. Fred Fromm, co-manager of Franklin Natural Resources fund, says that even if crude slides to $35 a barrel, oil companies will spend freely for several more years.
A.G. Edwards analyst Poe Fratt says Baker Hughes should benefit this year from increased capital spending among its larger oil customers, such as ChevronTexaco and ConocoPhillips. He upgraded the stock to "buy" for aggressive investors last Thursday, calling it an "attractive pure play on the oilfield service industry." He says the company has improved its operating performance and has a strong earnings outlook for 2005 and 2006.
Analysts at Standard & Poor's also like the stock. In the March 9 edition of The Outlook they say they expect demand to rise for technological services that improve drilling efficiency and enhance production, and that Baker Hughes is well positioned to benefit. "The company is a major player in several key technological areas," they say. Analysts upgraded Baker Hughes to "buy" and say the shares appear undervalued according to their calculations.
S&P adds that the firm is expected to generate $550 million in free cash flow this year, which analysts believe will go toward reducing debt.
Fratt raised his 2005 earnings per share estimate by 18 cents, to $1.97. S&P expects similar earnings.
Baker Hughes pays an annual dividend of 46 cents per share, resulting in a yield of about 1%. At $45, shares trade for about 23 times the consensus 2005 earnings estimate of $1.93 per share.
--Lisa Dixon and Jeffrey Kosnett