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Morningstar | Baker Hughes' FVE Reflects Possible Value Destruction From GE Separation

Baker Hughes, a GE Co., pronounced itself as the oilfield-services company of the future upon completion of its merger in July 2017, with promises of an imminent transformative leap in customers’ performance along with unrivaled value creation for its shareholders. Yet to bring this vision even remotely close to reality, management has a difficult task. The one half of the company that consists of the former Baker Hughes has faced over a decade of deteriorating market share and overall performance relative to leading oilfield-services peers. While we think there is ample room to beat the performance of prior management, we have been skeptical of new management’s ability to transform Baker Hughes into a first-tier oilfield-services company. And, with the company now being forced into an accelerated timetable for separation with parent GE, hopes for the kind of transformation envisioned back in 2017 have been all but quashed. Notwithstanding profitability improvement from continued cyclical recovery and correction of prior management's mistakes, we expect Baker Hughes to remain third in the pack behind peers Schlumberger and Halliburton for years to come.Meanwhile, the remaining portion of the company, coming from GE Oil & Gas, has encountered falling performance in recent years, particularly in the turbomachinery segment, which has derived a large portion of its revenue from supplying equipment for liquified natural gas projects. Indeed, what was once a flood of LNG projects has now all but dried up. We expect LNG markets to remain oversupplied until the early 2020s, limiting the need for new capacity additions until then. And, even when new LNG project demand resumes, we doubt the pace will ever approach the relentless 2014 to 2016 period, thus limiting the turbomachinery segment’s ability to ever fully recover.