An Oil Services Pair Trade From Piper Jaffray
PiperJaffray's Bill Herbert upgraded Baker Hughes' stock from Neutral to Overweight with a price target raised from $35 to $39. The analyst downgraded Weatherford International's stock from Overweight to Neutral with a price target lowered from $4.20 to $2.35.
The bullish case for Baker Hughes' stock is based on a combination of factors, Herbert said in the upgrade note.
The stock is trading at 12.4x the analyst's 2020 EPS estimate and 11.8x the Street's 2020 estimate. This represents a discount versus some of its peers, including Schlumberger Limited (NYSE:SLB), the analyst said.
Baker Hughes' balance sheet is "essentially best-in-class" among diversified service peers, with a net debt/cap of 6 percent and debt-to-EBITDA below 1x, the analyst said. The company's free cash flow generation is attractive and should generate $375 million in 2018, $1 billion in 2019 and $1.7 billion in 2020, according to PiperJaffray.
Weatherford's "prodigiously heavy" balance sheet is one reason for PiperJaffray's downgrade, Herbet said. The company holds $7 billion in net debt and about $580 million in annualized interest expense versus a market cap of $2 billion, the analyst said.
Any hopes of achieving a "satisfying resolution" to Weatherford's financial inflexibility are diminishing at a time when a business turnaround is taking longer than originally expected, Herbert said.
PiperJaffray's revised price target of $2.35 per share is based on 7.5x EV/2020E EBITDA, which represents a decrease from a prior multiple of 9x. This is justified given the company's unfavorable debt load and a slower pace of improvement in its operational turnaround, Herbert said.
Shares of Baker Hughes were up 4.14 percent at the close Tuesday, while Weatherford shares were down 0.23 percent.
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