The shares of Baker Hughes (NASDAQ: BKR) currently trade 50% above pre-Covid levels observed in January 2020 while the shares of its competitor Schlumberger (NYSE: SLB) are up by just 3%. Does that make SLB stock a better pick over BKR? Both companies provide oil field services including drilling & completion and production solutions to upstream oil & gas companies in the U.S. and abroad. Due to lower benchmark price expectations in the long term, SLB and BKR incurred sizable impairment charges in 2020. However, the recent uptick in the oil benchmark due to strong demand, supply constraints by the OPEC, and economic sanctions on Russia, have increased demand for oil rigs across the world. Given Baker Hughes’s lower financial leverage, comparable topline to Schlumberger, and a low valuation multiple, Trefis believes that the stock is a good pick to realize more gains. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Baker Hughes vs. Schlumberger: With Return Forecast Of 109%, Baker Hughes Is A Better Bet
- Revenue Growth
Baker Hughes has observed a lower decline in revenues in recent years as compared to Schlumberger. Baker Hughes revenues observed an annual decline of 4% from $22.8 billion in 2018 to $20.5 billion in 2021, whereas Schlumberger reported an annual decline of 11% from $32.8 billion in 2018 to $22.9 billion in 2021. Top line contraction has largely been due to a decline in rig count figures and capital control measures implemented by upstream companies.
- Schlumberger’s four operating segments, Digital & Integration, Reservoir Performance, Well Construction, and Production Systems contribute 12%, 28%, 36%, and 24% of total revenues, respectively. The uncertain demand environment had persuaded upstream companies to limit capital expenses in the last two years. However, the surge in benchmark prices due to the Russia-Ukraine war has rekindled demand for oil field services – taking worldwide rig count figures from 1,521 in December 2021 to 1,850 at present. Moreover, the company’s digital solutions business is likely to assist margin expansion in the coming years.
- Baker Hughes’ four operating segments, Oilfield Services, Oilfield Equipment, Turbomachinery & Process Solutions, and Digital Solutions contribute 47%, 12%, 31%, and 10% of total revenues, respectively. The company’s international operations have been assisting the top line in recent times, which observed a 10% contraction from pre-pandemic levels and contributes 80% of total revenues.
- After reporting relatively flat revenues for FY2021, Baker Hughes and Schlumberger are expected to observe strong growth in FY2022. (related: How Does Schlumberger Make Money?)
- Returns (Profits)
As both companies incurred sizable impairment charges leading to 25% contraction of the balance sheet, we compare their cash generation capabilities. In 2021, Schlumberger generated $4.6 billion of operating cash from $22.9 billion in total revenues – implying an operating cash flow margin of 20%. Whereas Baker Hughes reported $20.5 billion in total revenues and $2.3 billion of operating cash flow – resulting in a margin of 11%.
- Schlumberger’s cash generation capabilities have been stronger than Baker Hughes which has resulted in a sizable difference in the P/S ratio. In 2021, Schlumberger and Baker Hughes’ P/S multiple was 1.5 and 1.2 respectively. Historically, it has been observed that there is a difference of 0.5 units between Schlumberger and Baker Hughes.
- However, the difference between Schlumberger’s non-cash depreciation charges and capital expenditures was higher than Baker Hughes – affecting the operating cash flow margin figures.
- Before the pandemic, Schlumberger returned 50% of operating cash to shareholders as dividends and invested 30% in property, plant & equipment as capital expenses. Whereas, Baker Hughes had been investing its operating cash in capital assets.
- Both companies implemented cash control measures and limited capital expenses as well as dividend payouts due to the pandemic. Given Schlumberger’s higher cash generation capabilities and historical dividend trends, it is a good pick to earn consistent dividend income.
Per annual filings, Schlumberger and Baker Hughes reported $13 billion and $6.7 billion of long-term debt, respectively. While a shrinking asset base due to impairment charges is a drag on shareholder returns, Baker Hughes’ lower financial leverage is a boon during uncertain times.
- Higher financial leverage coupled with continued revenue growth augments equity returns. However, interest expenses weigh on finances as revenues decline – limiting dividend payouts and capital expenses.
- Schlumberger’s higher financial leverage compared to Baker Hughes, despite similar revenues and a comparable balance sheet size, makes SLB stock a riskier bet.
- In 2021, Schlumberger and Baker Hughes’ total assets were $41 billion and $35 billion, respectively.
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|S&P 500 Return||5%||-3%||106%|
|Trefis MS Portfolio Return||3%||-7%||266%|
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