Analysts Largely Positive on the 'New' Baker Hughes Ahead of Analyst Day

 | Dec 07, 2016 | 2:47 PM EST
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It's nearly time for General Electric (GE) and Baker Hughes (BHI) to show analysts what the "new" Baker Hughes will look like next year.

The two companies are hosting an analyst day Thursday to cover the pending merger of GE Oil and Gas and Baker Hughes. Shares of the oilfield services company as well as industrials giant fell on Wednesday in a broadly higher market.

At the end of October, the two companies agreed to combine GE's oil and gas (GE O&G) business and Baker Hughes to create the "new" Baker Hughes. Under the terms of the agreement, Baker Hughes shareholders will receive a one-time cash dividend of $17.50 per share. GE will own 62.5% of the company, with Baker Hughes owning 37.5%. The transaction is expected to close mid-2017.

"We think the increased scale and stability of the 'New Baker Hughes' afforded through the transaction enhances the company's competitive position and further aligns BHI with its vision of shifting its focus to products and technology and away from fully integrated services," RBC Capital Market's Co-Head of Global Energy Research, Kurt Hallead, wrote in a research note Wednesday.

The firm expects the analyst day event to cover the pro forma company profile, along with long-term targets beyond the framework of $34 billion in revenues, $8 billion of EBITDA and $0.08 of earnings accretion by 2020.

"The amount of commentary around integrating digital solutions into the oilfield/wellbore and an enhanced ability to address greater scope of projects leads us to wonder if greater revenue opportunities are available," Hallead said. He expanded on his comments, saying that the combined entity will tap into the GE store and provide solutions that "should help the oil industry increase production and reduce costs." RBC rates BHI shares at Outperform with a $61 price target.

More specifically, Action Alerts PLUS (AAP) senior analyst Scott Berman, says the charitable trust is looking for how GE is going to integrate its Predix Platform in the oilfield space and if that will open up additional opportunities. Predix is an application platform for building and operating apps for the Industrial Internet.

"We view the opportunity for Predix as the driving force that will take GE to the next level ... Importantly, GE has the scale and technological expertise to succeed in this space and has only added to its offerings through ownership of a new Baker Hughes, which will bring forth a larger client base for Predix," AAP portfolio managers Jim Cramer and Jack Mohr wrote in a note to subscribers following the merger announcement.

Furthermore, considering recent oil & gas sector news -- namely OPEC's recent deal to cut production for at least six months -- Berman says AAP will be looking for comments on whether the recent uptick in oil prices adds an additional boost or is in-line with expectations, and how higher oil prices will impact the new company.

Meanwhile, BMO Capital Markets analyst Daniel Boyd continues to view the merger positively, but sees three reasons for less relative upside.

First, Boyd says GE O&G business is late-cycle, driven by long-lead-time projects. While GE's business is less cyclical, he notes that 2016 orders are trending down 50% vs. 2014.

Second, the new combined entity's NAM onshore upstream mix is down to 12% in 2016, compared to Baker Hughes' 44% in 2014.

Third, Boyd sees limited upside on relative valuation to Schlumberger (SLB) ; he says the new Baker Hughes is trading at 10.8x 2018 guidance, while Schlumberger is trading at 12x 2018 guidance. (Schlumberger is also a holding in Action Alerts PLUS.)

Even with those reasons outlined, BMO rates BHI shares at Outperform with a $68 price target, primarily because the new company has "an opportunity to be a stronger full-cycle company with improved Free Cash Flow generation."

"BHI and GE are better together, no doubt," Boyd added. "But both of these energy franchises have a poor history of execution and we think results could lag over the next 12 months due to integration risks."

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