Investors appear to be valuing major US oil and gas producers off an extremely conservative discounted net asset value model. We remain in caution mode when it comes to fresh money buys as a result, but we are more bullish than ever on the long term. One company we like is Baker Hughes Co. (BKR), explains Elliott Gue, editor of Energy & Income Advisor.

A month ago, the S&P Energy Index and the Oil Services Sector Index were underwater by double-digits. Now both averages are back to roughly breakeven for 2023. And the midstream focused Alerian MLP Index has moved from slightly less than zero to a solid upper single digit percentage return.

The S&P Energy Index, however, has outperformed the S&P 500 by nearly 30 percentage points since the Federal Reserve began raising interest rates—and introducing recession risk—in March 2022. The Alerian Midstream Index is nearly 15 percentage points higher and the Oil Services Index is by about 25 percent.

That outperformance suggests another force is at work this time around, namely the kind of resilient inflation we haven’t seen since the 1970s. One way to profit from it is BKR.

Logo  Description automatically generatedLike rival Schlumberger Ltd (SLB), Baker’s numbers and guidance are as interesting for what they say about producers’ plans for capital deployment as for the company’s own financial health and growth. Baker posted solid Q1 results, including an 11.6 percent year-over-year increase in orders, 18.2 percent higher revenue, a 25 percent boost in EBITDA and 47 percent higher adjusted operating income.

Q1 earnings per share were up 85 percent excluding a gain of 28 cents per share from non-recurring items. And the company swung to free cash flow.

Results were generally lower sequentially from Q4, which management partly attributed to “macro volatility.” But they were also at the high end of guidance, as management largely maintained full-year projections including for $24 to $26 billion revenue led by Industrial & Energy Technology (IET) orders on track to “meet or potentially exceed the high-end of our guidance range of $10.5 to $11.5 billion.”

Baker is well placed to ride global growth in demand for natural gas in coming years in multiple ways. That includes the LNG trade, with management expecting 65 to 115 MTPA of projects reaching final investment decisions this year. The company also has about 70 percent of its Oilfield Services and Equipment (OSE) business focused internationally, with opportunities in shallow water and deepwater growth in the Middle East and Latin America.

Recommended Action: Buy BKR up to $40.

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