Morgan Stanley Downgrades Baker Hughes As 'Land Rig Count In Free Fall'

• Baker Hughes Incorporated BHI shares have gained 5 percent since January 8.
• Morgan Stanley’s Ole Slorer downgraded the rating for the company to Equal-Weight, with a price target of $47.
• The Nam rig count is entering a free fall phase which may result in oil rebalancing, Slorer noted.

Analyst Ole Slorer mentioned that liquidity and balance sheet strength remain vital for the survival of oil services, drilling and equipment companies. He added, however, that dividend “may trump all.”

Related Link: Natural Gas Rig Count Hits Lowest Level In 29 Years

Since the OPEC meeting on November 14, 21 companies had announced dividend cuts and on an average these companies had “underperformed the OSX by ~4% on the day of trading material to the announcement and by ~6% in its respective week,” Slorer wrote.

The analyst pointed out that the stocks that outperformed following dividend cuts were of companies with clean balance sheets suggesting that the “market has not rewarded small fixes to otherwise-challenged balance sheets.”

Slorer noted that the NAm rig count is entering a free fall phase with further contractions expected in the near future. This is expected to result in an eventual oil rebalancing.

There are growing risks related to the pending deal between Baker Hughes and Halliburton Company HAL, Slorer said. He added that the EU had extended the deadline for the deal by 20 working days to June 23, which was typical for complicated deals in Europe.

The analyst believes that the market is “not pricing in the necessary risk associated with a potential failed deal.” Baker Hughes’ weak 4Q results raise concern around the company’s ability to execute as a standalone company.