Sept. 11, 2017 12:53 p.m. ET
If they gave out grades for corporate names, “ Baker Hughes, a GE Company BHGE 2.96% ” would get a D-minus. In terms of recent financial performance, neither of the parties to the merger completed two months ago deserved more than a gentleman’s C.
But the company’s grade should go higher over the next few years as new management, a solid balance sheet and strong business lines combine to boost Baker Hughes BHGE 2.96% (we’ll drop the last part) ahead of its competitors. While the company is still exposed to energy prices, it expects $1.6 billion in annual deal synergies and cost savings by 2020, a boost its rivals won’t get.
The Wall Street Journal’s Heard on the Street writers are highlighting securities that they see as either undervalued or overpriced.
As the name suggests, the new company is the result of an unusually-structured merger between GE’s energy business and oil services company Baker Hughes. Business has been tough and remains so for the industry. Earnings expectations have fallen this year for Baker Hughes and its rivals.
Over the past three years, a period encompassing the oil bear market, the aborted merger with rival Halliburton and its merger with General Electric, legacy shareholders of Baker Hughes have a negative 21% total shareholder return. That compares with negative 36% for industry-leader Schlumberger and negative 31% for Halliburton. Of course a chunky $3.5 billion breakup fee from Halliburton and a $7.4 billion cash dividend from GE played a big role in that performance.
Now, though, Baker Hughes is effectively a brand new company run by a man who has never held that role. Chief executive Lorenzo Simonelli and his team have been handed fresh incentives to meet financial goals—something that often spurs results when new public companies are created. Besides the synergies and cost savings, Baker Hughes is the only big player in the industry with net cash on the balance sheet and has business lines, mostly courtesy of the legacy GE oil and gas business, that are less sensitive than most peers to petroleum prices remaining in the doldrums.
With GE owning 62.5% of the operating company and having signed a five year standstill agreement on buying the rest, a bid for the 37.5% rump is out of the question. But GE has a new chief executive and an activist shareholder looking to shake things up. The awkward status quo could change in two years, or even less with approval from a conflicts committee, which could include a tax-free spinoff.
That perceived overhang is a temporary weight on the share price but, on enterprise value to forecast 2018 Ebitda, Baker Hughes trades at about a 15% discount to the average of five industry peers. If it can exceed muted expectations once it begins reporting consolidated results then that gap should narrow.
Write to Spencer Jakab at firstname.lastname@example.org