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Here's Why Shares of Baker Hughes Slumped in January

Motley Fool - Sun Feb 4, 11:39PM CST

Shares of oil and gas equipment and services company Baker Hughes(NASDAQ: BKR) declined 16.6% in January, according to data from S&P Global Market Intelligence. The decline comes as the company's fourth-quarter 2023 earnings and 2024 guidance confirmed some of the near-term headwinds in its business. In a nutshell, it's not that Baker Hughes isn't set to grow again this year. It is. But recent events have tempered its 2024 growth outlook.

Baker Hughes' near-term headwinds

The company's troubles in the short term come from three interconnected factors. First, according to CEO Lorenzo Simonelli, "[W]eaker-than-anticipated oil demand coupled with robust production growth led to an unexpected inventory build into year-end." That's bad news for Baker Hughes, because it encourages oil companies to hold back on investment.

Indeed, Simonelli noted that the company had lowered expectations for North American drilling and construction spending in 2024 from being "flattish" to a new expectation of a low- to mid-single-digit decline.

The weaker demand comes from the uncertainty around the global economy and ongoing geopolitical tensions in 2024.

Second, the combination of weaker demand and robust production growth helped contribute to a decline in the price of oil. While the price is up in 2024, the current price per barrel of $72.40 is significantly below the near $94 record in late September. Lower oil prices discourage investment and cause investor sentiment to turn negative on energy equipment and services companies.

Third, Baker Hughes isn't just about oil; it has heavy exposure to the gas and LNG equipment market, and the recent weakness in LNG prices may negatively affect demand at some point. In addition, the U.S. LNG market suffered a blow recently from the Biden administration's decision to pause decisions on pending approvals of LNG export terminals, a move that will lower confidence in the U.S. LNG industry.

Baker Hughes

While the company's growth outlook has been tempered, it's still in growth mode, and its long-term prospects are excellent. Management expects adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) of $4.1 billion to $4.5 billion in 2024, compared with $3.76 billion in 2023.

An oilfield worker.

Image source: Getty Images.

In addition, Baker Hughes continues to grow its new energy business -- including carbon capture, carbon compression, and hydrogen storage and utilization solutions -- with management expecting orders of $800 million to $1 billion in 2024 representing a "more than tripling of New Energy orders since 2021," according to CFO Nancy Buese on the earnings call.

Meanwhile, a price of oil of $72 a barrel is still conducive to investment in the industry and significantly above what many may have predicted, given the weakness in global growth right now. As such, Baker Hughes remains an excellent option for investors looking for energy exposure in their portfolio.

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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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