Core Labs Vs Baker Hughes Stock: Q1 2019 was the best quarter for oil prices in a decade, although the second quarter saw more volatility and declines. The status of oil as the lifeblood of modern civilization is continuing unabated, despite the growing push for use of alternative renewable energy sources.
For a variety of reasons, oil companies are looking like an attractive investment right now. Baker Hughes [NYSE: BHGE] and Core Laboratories [NYSE: CLB] are two oil producers whose stocks have both performed well in 2019–but which one of them is the better buy overall right now?
Pros and Cons of Investing in Oil Producers
Oil, gas, and other fossil fuels are a lucrative industry, which means that their stocks have the potential to be highly profitable for investors as well. The good news for U.S. oil companies is that oil production and efficiency are expected to continue increasing into the near future.
The vast Permian Basin in the southwestern U.S. is estimated to account for 40 to 50 percent of new U.S. crude oil production, with total output of more than 12 million barrels per day by 2020.
However, the choice to invest in oil producers should be made only after considering several caveats. To begin with, oil prices can be highly volatile and unpredictable, depending on various international political and economic events that are entirely out of investors’ hands. For example, Bank of America Merrill Lynch has predicted that the price of oil could plunge by $30 if China ignores U.S. sanctions on Iran.
Oil companies that haven’t diversified as much as they could into other energy sources. These may be less of an appealing long-term investment, given the interest in switching to renewable sources of energy.
Still, one good reason to invest in oil is that its performance is often inversely proportional to the economy at large. Higher oil prices mean greater costs for businesses and consumers, which limits economic growth. As such, investing in oil can be a good hedge for your portfolio in the event of an economic downturn.
Is Core Laboratories Stock a Buy?
Core Labs is a service provider of core and fluid analysis for petroleum companies, which means that they advise other companies on how to maximize their oil production efforts.
Because of this peripheral role within the oil industry, which doesn’t require purchasing expensive heavy equipment, Core Laboratories would be less affected in the event of a downturn in oil prices.
The good news for Core Laboratories [NYSE: CLB] fans is that the company’s financial profile looks strong. As a $3 billion company, Core Laboratories currently has less than $300 million in debt, which is highly manageable.
This is especially true given that the company has no problem generating free cash flow – it’s done so successfully every quarter for more than 17 years, thanks to its less capital-intensive business model.
One potential concern for Core Laboratories [NYSE: CLB] is the plunge in share prices that occurred in April after the company posted strong yet still underwhelming Q1 results, given the major spike in oil prices that occurred at the same time. The Core Laboratories stock dropped by more than 10 percent, offering investors a chance to go bargain hunting.
Should You Invest in Baker Hughes Stock?
As with Core Laboratories, the fortunes of Baker Hughes [NYSE: BHGE] are highly dependent on the price of oil. However, the two companies have very different business models.
More specifically, Baker Hughes provides heavy equipment that it provisions for its customers’ drilling operations. This capital-intensive business model is both expensive and riskier, since the fate of the company is more closely tied to the price of oil itself.
One important note about Baker Hughes is that the company has been a subsidiary of General Electric since its merger with GE’s oil and gas division in 2017. This move has enabled GE to pursue a strategy of vertical integration across the industry: from drilling activities in the field to pipelines and refineries.
The financial profile of Baker Hughes [NYSE: BHGE] is weaker than Core Laboratories, although not cause for particular concern.
Since oil prices dropped in 2014, Baker Hughes has had issues with profitability, only returning into the black last year. In addition, Baker Hughes had a trailing debt-to-EBITDA ratio of 2.5 times in Q1 2019, versus Core Laboratories’ 2.1 times – not a favorable comparison for Baker Hughes.
Core Laboratories Stock Vs Baker Hughes Stock: The Bottom Line
Both Core Laboratories [NYSE: CLB] and Baker Hughes [NYSE: BHGE] are intriguing investments for those interested in oil production companies. However, Core Laboratories comes out on top here thanks to its more resilient business model and its strong financial profile.
As always, investors should know what they’re getting into before entering the volatile oil industry. In addition to Core Laboratories and Baker Hughes, consider investing in a larger, more diversified energy company such as ExxonMobil or Royal Dutch Shell.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.