Better Buy: Baker Hughes vs. Core Labs

Oil-field services stocks have gotten pummeled this year. Shares of Baker Hughes (NYSE: BHGE) are down more than 30% while Core Labs' (NYSE: CLB) shares have plunged about 40%. Fueling their sell-off is an unexpected crash in crude prices, which have fallen 30% due to a 180-degree shift in market sentiment.

The sell-off in these oil-field service stocks likely has bargain-hunting investors considering the sector. Here's a closer look at which of these stocks looks like a better buy right now.

The bull and bear case for Baker Hughes

Baker Hughes is one of the three largest oil-field service companies in the world. So, it should benefit from the expected rise in spending by oil and gas companies as oil market conditions improve. In the company's view, spending should expand at a 9% compound annual growth rate through 2021. That ramp-up of oil-field service activities should boost the company's margins and profitability, which should make its stock more valuable.

In addition, Baker Hughes expects to save money as a result of last year's merger with GE's (NYSE: GE) oil and gas business. The company has already reduced its annualized expenses by $700 million in 2018 and expects to increase that number to $1.6 billion by 2020. That should boost its profitability even further in the coming years.

However, that deal with GE hasn't yet paid off as the company anticipated. It has struggled to integrate the two businesses, which has clouded the picture. Meanwhile, GE is looking to make a quick exit from its stake in Baker Hughes. The company has already sold down its interest from 62.5% to 50% and could keep paring its position in the coming year. That continued selling pressure could weigh on the share price of the oil-field service giant in 2019.

Another issue is that could weigh on Baker Hughes is that while it expects oil-field service spending to expand in the coming years, that might not happen. Several oil companies have already chosen to keep their budgets flat for 2019 after the recent drop in oil prices. That could put downward pressure on oil-field service activity levels and pricing in the near term, which could do the same to Baker Hughes' stock price.

The bull and bear case for Core Labs

Though Core Labs operates in the oil-field service industry, it isn't a traditional service company. Instead, it's more of a data and technology company as its bread-and-butter business is to analyze core samples from oil reservoirs. Because of that, it has the highest returns on capital as well as some of the best margins in the oil-field service sector.

Core's focus on technology also means it's less sensitive to short-term fluctuations in oil prices. That's because its largest revenue opportunity comes three or four quarters after an oil company sanctions a major project, such as an offshore development since "rigs need to be mobilized, wells drilled, and core and fluid samples taken and then returned to our laboratories," according to CEO David Demshur. These longer-term projects tend not to be as sensitive to changes in oil prices.

As a result, projects that companies sanctioned in 2018 should begin generating revenue for Core during 2019. The industry has already announced more than 25 projects through the third quarter and it has several more in the pipeline, which suggests that Core should experience an uptick in its revenue during the second half of 2019.

The concern, however, is that the recent plunge in crude prices could cause oil companies to delay making a final investment decision on additional projects. While that's possible, it's less likely since oil companies have only been developing those with low oil breakeven levels. As they continue to green-light these projects, which are crucial to meeting future demand, they'll provide Core Labs with additional revenue opportunities.

Verdict: Core Labs is the better buy

While the sell-off in the oil market has weighed on both oil stocks, Core Labs seems to have fallen more than it should. For starters, it's less likely to see its margins contract in the coming year due to the recent drop in oil prices since its core business is to support longer-term projects. Meanwhile, Baker Hughes' stock could be under additional pressure in the coming year because of both the recent plunge in oil prices and the potential for GE to continue unloading shares. Those differences make Core Labs the better buy between the two right now.

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Matthew DiLallo owns shares of Core Laboratories and General Electric. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.