At the end of 1q18 the companys total

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At the end of 1Q18, the company’s total debt/capitalization ratio was 16.4%, well below the peer average. Short- and long-term debt totaled $7.472 billion at the end of the quarter. Cash and equivalents were $5.631 billion. On January 23, 2018, Baker Hughes, a GE company announced that it would increase its quarterly dividend from $0.17 to $0.18 per share, or $0.72 annually. The yield is currently 2.1%. Our dividend estimates are $0.72 for 2018 and $0.76 for 2019. MANAGEMENT & RISKS Martin Craighead, the former chairman and CEO of Baker Hughes, is the vice chairman of BHGE. Lorenzo Simonelli, the former CEO of GE Oil & Gas, is the company’s new chairman. The primary driver of BHI’s business is capital spending by customers. Demand for the company’s services is largely dependent on commodity prices, the number of oil rigs in operation, the number of oil and gas wells being drilled, the depth and condition of those wells, production volumes, and well completions. COMPANY DESCRIPTION Baker Hughes, a GE Company was formed from the merger of Baker Hughes Inc. and GE’s oil and gas business in July 2017. The new company is 62.5% owned by General Electric, and 37.5% owned by former BHI shareholders. The new BHGE is the world’s third-largest oil services company, with annual pro forma revenues of $23 billion and approximately 70,000 employees. INDUSTRY Our rating on the Energy sector is Over-Weight. We note that investors remain skeptical about the sector despite prospects for significant earnings acceleration in 2018-2019. We also expect Energy stocks to benefit as OPEC continues to limit production in order to boost oil prices. The sector accounts for 5.7% of the S&P 500. Over the past five years, the weighting has ranged from 5% to 12%. We think that investors should consider allocating 6%-8% of their diversified portfolios to the Energy group. The sector includes the major integrated firms, as well as exploration & production, refining, and oilfield & drilling services companies. The sector is underperforming in 2018, with a loss of 6.6%. It also underperformed in 2017, with a loss of 3.8%. By our calculations, the projected P/E ratio on 2018 earnings is 19.4, above the market multiple of 16.7. We forecast that West Texas Intermediate crude oil (WTI) will average $56 per barrel in 2018, up from $50 in 2017 and $43 in 2016 but well below the average price of $93 in 2014. At the same time, we expect oil prices to remain volatile. We look for a full-year price range of $48-$64 per barrel. Our 2018 forecast for the average wellhead price of Henry Hub natural gas is $2.90 per MMbtu with a range of $2.75- $3.05, compared to $3.00 per MMbtu in 2017.
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M ARKET D IGEST - 23 - VALUATION BHGE shares have traded between $25.53 and $60.77 over the past 52 weeks and are currently near the low end of that range, which we believe reflects the company’s weak performance relative to peers. The shares are trading at a 36.9-times our 2018 EPS estimate, reflecting the modest current-year earnings outlook, and at a more reasonable 21.3-times our 2019 estimate.
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