Baker Hughes Incorporated (NYSE:BHI)’s Gapping Gains on Earnings, Deal Chatter

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Baker Hughes Incorporated (NYSE:BHI) shot higher Friday following a late Thursday evening report in the Wall Street Journal that said the company was in deal talks with General Electric Company (NYSE:GE).

The WSJ said GE wanted to merge its oil and gas business with Baker Hughes and spin off the merged entity into a new listed company.

After the WSJ report was published A GE spokeswoman clarified: “We are in discussion with Baker Hughes on potential partnerships. While nothing is concluded, none of these options include an outright purchase.”

Shares closed at $59.12 with nearly 15 million traded.

Are investors reading too much into the report? Baker Hughes is dealing with the debris from its failed merger with Halliburton – a deal which fell apart under the glare of the regulators.

Baker Hughes Incorporated (NYSE:BHI) up 12.93% on the week

Investors in Baker Hughes were treated to two gap-up gains over the past week following favorable news flow.

On October 25 Baker Hughes jumped 4.3% higher after it reported better than anticipated third quarter earnings, with an adjusted loss of $0.15 per share versus analysts’ estimates of an adjusted loss of $0.45 per share. However, revenue of $2.4 billion missed estimates by $10 million and was down by 37% year on year.

On October 28, Friday, investors piled into the stock after the GE deal report and Baker Hughes was out of the gate with a nearly 6% gap open gain.

Analysts laud Baker Hughes Incorporated (NYSE:BHI)

Impressed with the quarterly, analysts at Cowen upgraded Baker Hughes from Market Perform to Outperform and boosted their price target from $47 to $65.

Cowen said: “We upgrade our rating to Outperform on the back of the company’s first solid quarter following the break-up of the merger with HAL…while BHI’s message on go-to-market is still evolving, execution on cost cutting has been impressive and we see more to come…we believe many investors have been on the sidelines with BHI since the merger, waiting for tangible evidence of execution… we see the valuation gap between BHI and peers beginning to close.”

Analysts at Scotia Howard Weil reiterated their Sector Outperform rating but raised their target from $56 to $62.

After Halliburton, will Baker Hughes Incorporated (NYSE:BHI) make good with GE?

Investors may recall that one of the regulatory sweeteners in the ill-fated Halliburton-Baker Hughes deal was the sale of a $7 billion package of assets to GE.

GE may still be interested in purchasing energy assets in the midst of a cyclical downturn in the oil services industry and continue its string of acquisitions, which, since 2007, has aggregated over $14 billion in value.

“If there’s a time to double down on the sector, now is the time given the prices we’ve seen,” said Jonathan Garrett, principal analyst for U.S. upstream research at Wood Mackenzie.

P.S. – In a late night article on Sunday, the WSJ said: “GE plans to contribute its oil-and-gas business and some cash to the new entity, which would have publicly traded shares and be majority-owned and controlled by GE,” quoting people familiar with the matter.

The announcement of the deal could come as soon as Monday (today) the WSJ said.

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