Last night Baker Hughes Inc. (NYSE:BHI) filed to sell up to $2 Billion in a mixed securities shelf, and this has surprisingly received very little coverage.  If you have been tracking this sector at all, you would wonder why on earth the company needs up to $2 Billion more.  None of the analysts that follow Baker Hughes are looking for losses any time this year or next with close to 20% earnings growth expected and it can internally service its debt without having to tap the markets, so they don’t have to raise cash.  The last time it filed to raise cash like this was in 1999 with a $1 Billion filing.

The company could be raising cash for a myriad of reasons, but raising some good old spending money would seem to be the most logical.  The markets have also closed the window or have at least made it less desired to borrow money just to buyback stock, but this is always possible as well.  Look at the "Use of Proceeds": acquisitions; working capital; capital expenditures; repayment of debt; and repurchases and redemptions of securities (identical to 1999 filing).

Baker Hughes is one of the leaders in the oilfield services industry as a supplier of products and technology services and systems to the oil and natural gas industry worldwide.  In a quite brief summary this includes products and services for drilling, formation evaluation, completion and production of oil and natural gas wells.  Baker Hughes’ shares are trading up over four-fold from the end of 1999-2000 and still up more than 100% from the start of 2005 when the sector and oil prices began a meteoric rise.

We just recently pondered how large General Electric’s (NYSE:GE) oil and gas operations would become since it is acquiring into the space.  The Transocean Inc. (NYSE:RIG) and GlobalSantaFe Corp. (NYSE:GSF) and other prior large deals spread out in the oil & gas sector are not expected to be the last in the space.  With other mergers selectively taking place in the sector and the company not truly needing the cash, it’s just hard to imagine anything different than Baker Hughes looking for some spending cash.  T. Boone Pickens recently called for $80 oil before he is 80, and there are some who still believe that $100 oil is coming.

The June 30 balance sheet is lean for a company with a $27.5 Billion market cap: a hair under $840 million in cash and short-term securities, but $2.333 Billion in receivables.  The company’s total assets (minus Goodwill, intangible, and ‘other’) is over $7 Billion; with the ‘official’ total assets at $8.99 Billion.  Its total debt is only $3.146 Billion, with under $2 Billion being allocated to long-term debt, deferred long-term debt, and other liabilities.

The company bought Western Atlas in the past and made several smaller deals since then, so it isn’t as though it wouldn’t be out of the norm for it to go shopping for a fairly large company.  It is very possible that the funds will in part just be used to repay some debt maturing in early 2009: per the annual report debt schedule it has notes due in January and February of 2009 that combined equals $534.4 million. 

If this is being done for defensive purposes that is another thing, although it is hard to imagine that a hostile deal would be headed its way.  We don’t want to fuel any speculation by throwing names out as to whom the company would look at.  Besides that there are just too many large and small companies (and units thereof) in too many segments that Baker Hughes could consider buying if it wants to.

Jon C. Ogg
September 6, 2007

Jon Ogg can be reached at [email protected]; he produces the 24/7 Wall St. SPECIAL SITUATION INVESTING NEWSLETTER and he does not own securities in the companies he covers.

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