Baker Hughes Suffers From a GE Discount

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Baker Hughes

BHGE 1.33%

a GE co.” stands out in the annals of unfortunate corporate naming.

At first it was just an unwieldy mouthful. Now, though, Baker Hughes is being hurt by its affiliation with the battered blue chip. Since the beginning of 2016, General Electrichas shed an astonishing $175 billion in market value. A halving of GE’s once-secure dividend and a Securities and Exchange Commission probe of its accounting have weighed on Baker Hughes.

None of GE’s woes should affect Baker Hughes directly, but the selloff has given investors an opportunity in the No. 3 oil field services company by revenue. In just the past three months,

Baker Hughes

BHGE 1.33%

shares have underperformed those of Nos. 1 and 2, Schlumberger and Halliburton, by 13.1 and 25.5 percentage points, respectively.

There is rarely any reward without potential loss, though. The case against Baker Hughes boils down to three risks.

First and most significant, GE has indicated it may sell its 62.5% stake, worth $23 billion, to bolster its balance sheet. That has created a so-called overhang, weighing on the share price. The announcement of a stock offering would worsen the pressure while a private equity transaction might boost the shares. Any deal before the summer of 2019 would have to be approved by an independent conflicts committee.

The second risk is that, if such a sale took place, it might sap some of the synergies GE touted less than a year ago. These include shared intellectual property and contracts that Baker Hughes has said could be at risk if GE’s stake falls below 50%.

The third risk is that Baker Hughes just isn’t a very good company. Full-year results released Wednesday were underwhelming, and it is the only one of five large U.S.-listed peers that has seen earnings-per-share estimates for 2018 drop since October as oil has rallied. Only 41% of analysts surveyed by FactSet have a buy rating on it, compared with an average of 79% for three currently profitable peers. Traditional valuation measures for the recovering industry, meanwhile, offer little insight.

Only formed in July, Baker Hughes can benefit from further integration, and its management has an incentive to prove something to the market. It also has the strongest balance sheet of its peers. While no cream puff, it is priced to move.

Write to Spencer Jakab at

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