Oilfield services major Baker Hughes Co. is leading a sector stock price recovery after a pummeling in March as producers ramp-up activity while shareholders look to invest in companies that are more proactive around the energy transition.
The share price of major oilfield services companies plunged in March as COVID-19 spread across the globe, sinking demand for oil and pushing producers to the sidelines, subsequently sapping demand for oilfield services and equipment.
Although not spared from the downward spiral, Baker Hughes' shares fared better than competitors Schlumberger Ltd., Halliburton Co. and National Oilwell Varco Inc. in both the downturn and the recent share price recovery.
"[Baker Hughes'] share price outperformance likely reflect[s] several factors including their emphasis on driving the Energy Transition," Evercore ISI analyst James West said in a Dec. 15 email.
Baker Hughes accelerated its commitment to clean energy and the energy transition in October 2019 when it officially changed its name from Baker Hughes, a GE company, to Baker Hughes Co. and rebranded from an oilfield services provider to an energy technology company.
West said the company's value has been buoyed by its leverage to LNG as a transition fuel, its clean balance sheet, its consistent dividend, and most recently the "highly successful IPO of C3.ai, in which Baker Hughes has an about 13% stake."
Baker Hughes invested about $70 million in artificial software provider C3.ai. That investment snowballed to an estimated value of about $1 billion based on the stock's opening price of $100 per share, according to Credit Suisse analyst Jacob Lundberg.
The relatively weak stock performance by industry bellwether Schlumberger, meanwhile, results from the behemoth company's "worst balance sheet" and "most significant value destruction under prior CEO" Paal Kibsgaard, Simmons analyst Bill Herbert said in a Dec. 15 email. Olivier Le Peuch succeeded Kibsgaard as CEO in August 2019.
Far less exposed than Baker Hughes to the energy transition, Schlumberger and the other leading oilfield services companies are looking for opportunities to invest in the energy transition as investment dollars become increasingly dependent on how a company handles environmental, social and governance issues.
In June, Schlumberger introduced its New Energy business, which houses energy ventures Celsius Energy — its low-heat geothermal initiative — and Genvia — a partnership with the French Alternative Energies and Atomic Energy Commission and Vinci Construction to advance hydrogen.
Houston-based Halliburton is taking a more cautious approach, taking advantage of capital already invested in digital and other technologies to support customer efforts to decarbonize production and reach their emissions reduction goals. Carbon capture and geothermal drilling services are also part of the mix.
Halliburton also created Halliburton Labs, lending its facilities, technical expertise and business network to early-stage clean-energy companies in exchange for a minor equity stake in them. However, President and CEO Jeff Miller said Halliburton is first and foremost an oilfield services company.
As oil prices rise and spending on exploration and production improves, shares of oilfield services companies should appreciate from current levels, West said. The Evercore ISI analyst said at the current $50 per barrel Brent crude oil price, oilfield services and equipment providers should begin to see more work.
However, the rate that oil demand will grow will slow considerably compared to the last 10 years, Herbert said. Crude oil will remain a prominent part of the energy mix, and investors, to some extent, will look beyond oil market exposure and invest in companies still able to generate generous free cash flow and investor returns, the Simmons analyst said, with the caveat: "[free cash flow] yields need to be approaching double-digit levels in order to attract high-quality capital."
While investors desire a more significant push towards greener energy, West said, "markets and valuations are more tethered to value creation than societal views, so the ultimate way to attract investors is through higher returns."
"The ultimate valuation levels which can be achieved, however, will likely be lower this cycle if the companies don't embrace the transition," West said.