Why You Should Eschew The New Baker Hughes; Bank Of America Rates Stock Underperform

Bank of America Merrill Lynch initiated coverage of Baker Hughes, a GE company Class A BHGE at Underperform, given the lack of catalysts.

That said, the firm believes the company offers investors exposure to an expected global oilfield services and equipment, with a solid, defensive balance sheet.

BofA Merrill Lynch has a $36 price objective for the shares of the company.

At the time of publication, shares of Baker Hughes were rallying 3.44 percent at $37.92.

Analysts Timna Tanners, J.B. Lowe and Ohsung Kwon have a cautious outlook on offshore equipment, which accounts for roughly 15 percent of the company's pro forma revenues, and the international services capital expenditure. The analysts indicated that the company has 71 percent exposure to international markets, with capex spending expected to rise 4–5 percent in 2018–2019.

Additionally, BofA Merrill Lynch is concerned about global liquified natural gas capex investment. The firm expects the capex to fall from the 2015 peak of $22.8 billion to $5 billion in 2019.

The firm also feels sideways oil price expectation limits catalysts for the company, given its predominant offshore and international exposure. Although the firm feels synergies detailed from the merger announcement has been well anticipated, it said it sees a relatively sluggish recovery in the company's oil and gas-exposed businesses.

Meanwhile, the firm said it preferred U.S. shale-levered plays for dynamic oil recovery exposure.

Given that the company derived much of its profits from its Turbomachinery and Process Solutions business, the firm feels the consensus looks too high. The firm noted that the TPS is heavily reliant on the oversupplied LNG market. The firm expects TPS revenues declining in 2018 and then show a mere 9-percent growth in 2019, with the growth premised on more services offered despite slugging equipment appetite amid a global glut.

On valuation, the firm said it thinks the company should trade at a discount to more proven higher-margin Schlumberger Limited. SLB but in line with Halliburton Company HAL, given its stronger balance sheet but its weaker NAM market position.

The firm indicated that both its 2018 and 2019 EBITDA estimates were below consensus expectations.