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Baker Hughes Company(BKR-Q)
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1 No-Brainer Energy Stock to Buy and Hold for 10 Years

Motley Fool - Thu Nov 2, 2023

The energy sector has been unloved in recent years, with investors stressing over the long-term future of fossil fuels in light of the rise of renewable energy. However, Baker Hughes(NASDAQ: BKR) has plans to navigate the transition, and recent events have worked in its favor.

In fact, the stock is one of the standout investment options in the sector. Here's why.

An energy company raises guidance

The company operates out of two segments, with oil field services and equipment (OFSE) providing solutions across the life cycle of an oil asset. The second segment, industrial and energy technology (IET), offers gas technology equipment and services to energy companies -- including natural gas and liquefied natural gas (LNG) -- and gas technology to industrial customers.

Despite fears over the long-term future of fossil fuels, Baker Hughes is benefiting from three near- to medium-term factors:

  • A combination of solid ongoing demand, production cuts by OPEC+ members, and measured capital spending increases have kept the price of oil relatively high, even given slower economic growth.
  • The LNG project pipeline was boosted by an increased willingness to spend on infrastructure following sanctions on Russia's gas exports.
  • The inflationary cost and supply chain issues in renewable energy have caused many to believe that the clean energy transition will take longer than previously expected.

These factors can be seen in the evolution of the company's full-year guidance. OFSE demand improved through the year, but the real upside came from the IET segment, driven by strength in LNG orders -- the segment has reported four straight quarters of LNG orders above $3 billion.

Oil barrels.

Image source: Getty Images.

The strength in the LNG pipeline encourages Baker Hughes management to believe that global LNG capacity will hit 800 million metric tons per annum (MTPA) in 2030, a near 70% increase from 475 MTPA in 2022. Such expansion will not only benefit the company's near- to medium-term equipment sales, but it will also increase the potential for long-term growth in gas technology services as the installed base of LNG increases. Figures in bold below represent increases:

Baker Hughes Full-Year Guidance

January

April

July

Current

Oilfield services and equipment revenue

$14.5 billion to $15.5 billion

$14.5 billion to $15.5 billion

$15.1 billion to $15.7 billion

$15.3 billion to $15.5 billion

Industrial and energy technology revenue

$9.5 billion to $10.5 billion

$9.5 billion to $10.5 billion

$9.65 billion to $10.35 billion

$10.05 billion to $10.35 billion

Industrial and energy technology orders

$10.5 to $11.5 billion

$10.5 to $11.5 billion

$11.5 billion to $12.5 billion

$14 billion to $14.5 billion

Total revenue

$24 billion to $26 billion

$24 billion to $26 billion

$24.8 billion to $26 billion

$25.4 billion to $25.8 billion

Total adjusted EBITDA

$3.6 billion to $3.8 billion

$3.6 billion to $3.8 billion

$3.65 billion to $3.8 billion

$3.7 billion to $3.8 billion

Data source: Baker Hughes presentations. EBITDA = earnings before interest, taxes, depreciation, and amortization.

Baker Hughes' long-term future

The improvement in near-term prospects will enable Baker Hughes to generate earnings and cash flow while it navigates the clean energy transition. I thought management did a good job of outlining how it plans this in its recent earnings presentation.

CEO Lorenzo Simonelli sees the company benefiting from the increased spending on LNG equipment in its OFSE and IET sectors through 2025.

The next phase, the so-called "Horizon Two," runs from the mid to late 2020s and is characterized by moderation in demand for upstream energy solutions while LNG services grow in line with the increased capacity, as discussed above.

In addition, Baker Hughes' own "new energy" solutions (carbon capture, carbon compression, hydrogen, storage, utilization) start to scale up. There's early evidence of this, with the company on track for $600 million to $700 million in new-energy orders in 2023 compared to $400 million in 2022.

An oilfield worker.

Image source: Getty Images.

By 2030, Baker Hughes will be in its so-called "Horizon Three," whereby, according to Simonelli, "we expect decarbonization solutions to be a fundamental component and, in most cases, a prerequisite for energy projects, regardless of the end market."

He expects its new-energy orders to hit $6 billion to $7 billion in 2030, a tenfold increase from 2023, representing the company's shift toward clean energy solutions as well as ongoing demand for fossil fuels, which will always be a part of the global economy.

An energy stock to buy

Baker Hughes offers investors a near- and long-term way to play near-term strength in traditional energy, as well as growth in LNG and long-term growth in new energy. The three factors discussed above are supportive of its transition, and it represents one of the best stocks to buy in the energy sector.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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