EUR 850.00 For Business Accounts Only

Morningstar | BHGE Updated Star Rating from 01 Nov 2018

Baker Hughes reported strong third-quarter results as revenue increased just 2% sequentially but adjusted operating margin increased to 6.7% from 5.2%. The improvement in revenue was driven chiefly by the Oilfield Services segment, but the operating margin improvement was broad based, as post-merger restructuring and efficiency-boosting measures have begun to play out in full force across the company. Our fair value estimate and no-moat rating remain unchanged for now.

Baker Hughes has impressively posted double-digit year-over-year revenue growth in its Oilfield Services segment in both North American and international markets. The 10% international market growth leads peers, which we think reflects share gains for Baker in certain markets, particularly in the Middle East (although Baker's share is still down cumulatively since the post-2014 downturn). Baker Hughes announced a number of new contracts that should lead to solid Oilfield Service growth in 2019, again with a strong Middle Eastern focus (prominently Saudi Arabia and Qatar). Management is targeting further share gain in the region, although we wonder whether this could be coming at the expense of pricing (as has been alluded to in peers' commentary).

Outside of Oilfield Services, continued benefit from cost-cutting should provide some benefit to bottom-line results through 2019. Furthermore, Turbomachinery & Process Solutions could finally see the margin benefit from an increasing services share of revenue over the next year. Services share of revenue has increased to 62% from about 56% a year ago, however the beneficial effects of this thus far have been offset by an increased proportion of lower-priced downstream market work across the segment. This negative shift to downstream should abate in 2019, but the outlook for services growth remains strong, indicating likely margin expansion (as we expect).