Why Baker Hughes Stock Plummeted 35% in March

What happened

Shares of diversified energy services company Baker Hughes (NYSE: BKR) fell just under 35% in March according to data from S&P Global Market Intelligence. That was brutal and much worse than the S&P 500 Index, which was down "just" 13% over the same span. While Baker Hughes rebounded off its lows by the end of the month, that's not much solace.

Unfortunately, the pain isn't likely to be over yet (even though the stock has continued to rebound with the price of oil of late).

So what

The easy reason behind Baker Hughes' painful stock decline is that COVID-19 sent the market into a downward spiral. To be fair, that's a big piece of the story, here.

Oil drilling is a cyclical industry, and Baker Hughes' customers are basically all within the energy space. The world's efforts to slow the spread of the coronavirus have been driven by closing businesses and asking people to stay home. Demand for oil has fallen dramatically, pushing prices for the commodity lower. Low energy prices tend to lead to a drop in drilling. And that, in turn, means Baker Hughes' customers aren't spending as much on its products and services.

Two men working in hard hats at an oil well

Image source: Getty Images.

If that were the only headwind Baker Hughes was dealing with, it wouldn't be so bad. The problem is that there are a couple more negatives out there. First is the long-term shift in the energy market, with onshore U.S. oil and natural gas drilling disrupting the normal flow of things and leading to a global glut of oil. That has kept prices range-bound for years, with OPEC's attempts to cut back on production simply being offset by more production in the U.S. market. 

That situation led to problem No. 2: OPEC and Russia got into a price war. That led to the expectation of more oil flowing into the market. The last thing an already oversupplied commodity market needs is more of the commodity. That's doubly true when COVID-19 looks likely to push the world into a global recession, which will result in even less demand.

More oil at the exact time when demand is falling is a terrible combination. Energy companies are scrambling to cut production, which means even less demand for Baker Hughes. No wonder the energy services company's shares were hit so hard.

Now what

There's no way to sugarcoat the industry-wide problems facing Baker Hughes today. That remains true even as rumors circulate that OPEC and Russia are considering ending their feud. Yes, oil prices have rallied, but the supply glut isn't going to get better that quickly. All of the extra oil being pumped out of the ground today is being put into storage for use later. That means, even after the world starts getting back to normal and energy industry conditions begin to improve, there will still be a supply overhang. At this point, investors should probably watch Baker Hughes from a distance.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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