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(B)(N) BHI Baker Hughes Incorporated

January 17, 2014
Flare Gas in Dakota

Flare Gas in North Dakota

Drama. Investors have been pumping up the oil services stocks since early last year and although we can safely join them at the pump, there are lots of reasons for us to keep our heads covered and our hands close to the vest (The Street, January 17, 2014, Baker Hughes Starting to Look Slick and The New York Times, October 17, 2013, Oil Companies Are Sued for Waste of Natural Gas).

It’s a hard-scrabble industry and runs with the efficiency of an armed force. The fundamentals are straightforward and the companies tend to keep whatever they get because they need to finance operations, growth and the payroll with bank debt from contract-to-contract and the future is uncertain. Please see Exhibit 1 below.

Exhibit 1: US Oil Service – Fundamentals – January 2014

US Oil Services - Fundamentals - January 2014

Our estimate of the downside in the portfolio due to the demonstrated volatility of the stock prices is minus (8%) and we can protect ourselves against surprise with the usual attention to our stop/loss prices. Please see Exhibit 2 below.

Exhibit 2: (B)(N) US Oil Service – Prices & Portfolio – January 2014

US Oil Services - Prices & Portfolio - January 2014

US Oil Services – Prices & Portfolio – January 2014

How you all doin'?

How you all doin’ today?

So who buys these stocks? “Investors” will if they see that the earnings are strong or improving and the [P/E]-multiples make them look “cheap” or are in line with their expectations even though few of them have ever been in an oil field or had a drink with a “roughneck”.

Exhibit 3: US Oil Service – Risk Price (SF) – January 2014

US Oil Service - Risk Price (SF)

US Oil Service – Risk Price (SF)

Investors who had insight into the industry began buying in 2012 (two years ago) and pumped the stock prices up from the blow-out prices of $125 billion in mid-year 2012 to $150 billion by mid-year 2013 before others (the “newbies”) jumped on and flared the price to the current $180 billion and above but still close to the “fair value” at the “price of risk“.

For more information and additional references to the theory, please see our Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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