BHI: Bullish Long-Term Outlook

10/22/2015 10:12 am EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

Though the weak oil price environment is now a global concern, Michael Berger, of Technical420.com, thinks it is temporary and shares two reasons as to why he has become increasingly favorable on the stock of one of the world's largest oil field services companies.

According a report released by the International Monetary Fund (IMF), Saudi Arabia, Bahrain, and Oman may run out of financial assets needed to support spending within five years if the government maintains current policies.

With Saudi Arabia getting around 80% of its revenue from crude oil, the situation will only improve as the price of crude recovers. Out of all the Organization of Petroleum Exporting Country (OPEC) members, Saudi Arabia has increased production the most in order to maintain market share even as prices continue to edge lower.

Iranian Oil Minister Bijan Namdar Zanganeh recently said that OPEC members should cut crude output so prices can bounce back to $70-$80 per barrel. Even though this sounds positive, Iran has no intention on cutting production. Iran actually plans to dramatically boost output in the coming months.

An Unexpected Catalyst?

This development may serve as an unexpected catalyst for United States oil producers because weak oil prices are affecting all countries. As earning season approaches, we are cautious with many energy companies. The weakness in the commodity market continues to be a headwind for energy stocks and we expect to see a number of companies miss earnings and guide lower.

Although the weak price environment is concerning, it is only temporary. One of the stocks we have become increasingly favorable on is Baker Hughes Incorporated (BHI). Our favorable outlook on BHI stems from our bullish long-term outlook for the North America energy services market and a favorable acquisition price.

Last November, Halliburton Company (HAL) agreed to acquire BHI for $34.6 billion. This equates to $78.62 a share in a cash and stock merger. HAL is paying an over 40% premium to BHI shareholders and offering a lot of stock to get the deal done. Each BHI shareholder is set to receive 1.12 shares of HAL and $19 in cash per share if the deal closes. Should the deal not close, HAL must pay BHI $3.5 billion or $8 per share, giving BHI shareholders some additional protection.

The Weak Price Environment Hurts Everyone

Recent announcements from OPEC nations lead us to believe that they are suffering from the weak price environment just as much as we are. Although they are able to produce oil at lower prices, it represents a much larger portion of their economy. We will continue to monitor OPEC developments and keep you updated on important announcements.

Michael Berger, Founder and President, Technical420.com

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