Baker Hughes, A GE Company (BHGE) reports Q4 earnings Wednesday. Analysts expect revenue of $5.62 billion and eps of $0.14. The revenue estimate implies 5% growth Q/Q. I expect Q4 to reflect a push/pull between short-cycle and long-cycle businesses. Investors should focus on the following key items.
Short Cycle Businesses Could Stall
In Q4 2016 GE (GE) Oil & Gas merged its operations with the former Baker Hughes. The transaction was completed in July. BHGE represents 37.5% of the merged entity. The deal gave GE greater exposure to North America land drilling, while it gave Baker Hughes added scale and diversification. The company’s Q3 revenue was off 1% sequentially.
Revenue from shorter-cycle businesses such as Oilfield Services and Digital Solutions both rose 4%. It could deliver single-digit revenue growth again. For the week ended January 12, 2018, the U.S. rig count was up over 40% Y/Y. However, the rig count was practically flat compared to 939 at the end of Q2. Despite oil prices hovering near $70 Schlumberger’s (SLB) revenue from North America was only up 8% sequentially. BHGE’s Short-cycle businesses represent just over 60% of total revenue. If the rig count has plateaued then that could mean low to stagnant revenue growth for these businesses going forward.
Long-Cycle Businesses Could Show Signs Of Life
I was originally bearish on the merger because it exposed Baker Hughes to GE’s subsea businesses which were in the doldrums. Since oil prices fell below $60 this has been the worst-performing segment of the oil services space. In Q3 revenue from longer-cycle businesses such as Oilfield Equipment and Turbomachinery fell 13% and 5%, respectively. With oil now hovering near $70 these segments could show signs of life. Schlumberger credited its OneSubsea segement, which provides equipment to the deepwater oil and gas market, with helping spike its Q4 Latin America revenue.
This could also portend positive developments for BHGE’s Oilfield Equipment and Turbomachinery segment this quarter. Since deepwater equipment sales tend to be long-tail businesses, any traction could create revenue in the future even if oil prices fall back to the $50 dollar range.
Time For Cost Synergies To Kick In?
BHGE’s EBITDA margin was 9% during Q3. That pales in comparison to Schlumberger and Halliburton (HAL) whose margins were in the high-teens to low 20% range. The merger was expected to generate cost synergies. The merger was completed in July 2017. It could be difficult to realize potential cost synergies from the merger if top line growth remains stagnant to declining. At the end of the day management will have to improve upon its 9% margins reported in Q3 or the merger could be a disappointment.
BHGE trades at over 21x run-rate EBITDA and cost synergies could be priced in already. Until BHGE can show consistent improvement in its EBITDA margins the stock is a hold.
Actor Chad L. Coleman will host Trump And The Global Economy February 6, 2018 in Brooklyn.
The panel will include Christopher Townley (land baron), Reverend Conrad Tillard (activist, WHCR 90.3 FM), Wuyi Jacobs (AfrobeatRadio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead. The event will take place at South Oxford Space in Fort Greene, Brooklyn from 6PM – 8PM. Tickets are available on Eventbrite. Come early and bring friends.
Coleman is best known for his breakout role as Tyreese in The Walking Dead and Dennis ‘Cutty’ Wise in The Wire. He currently recurs on Syfy’s The Expanse and will star in Lifetime’s upcoming biopic Michael Jackson: Searching for Neverland set to premiere May 29.
According to Ralph Baker who Helped found the event, “We are excited to work with Chad to help spread the word about Trump And The Global Economy. These are trying times we live in and the community is dependent on artists like Mr. Coleman to continue to tell our stories through their music, film, plays, books, etc. Brooklyn has a Rich, vibrant, art community. We would love for the art world and the broader community come out to network and take in what the panel has to say.”
The town hall brings together a cross-section of individuals to discuss everything from President Trump’s policies on economics, immigration, and foreign affairs, to what his election says about America. Individuals on the front lines will bring you real information about the Trump administration that impacts the community.
The most recent Trump And The Global Economy town hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Mr. Jacobs and Mr. Baker. The event was well-received by the community. We parsed through President Trump’s proposed tax plan and high net worth individuals could potentially game the system by shifting income around. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?
The June 27 2017 event included Mr. Tillard, John McLaughin, who did the polling for President Donald Trump during his presidential election, Mr. Jacobs and Mr. Baker. Trump And The Global Economy is a quarterly event and is fast becoming the “must see” event in Brooklyn.
Live Stream Available February 6, 2018 At 6PM
Live stream for the February event is below. The live stream will be active February 6th at 6PM.