Activist Ananym Capital sees upside if Baker Hughes spins off oil services

Company: Baker Hughes (BKR)

Business: Baker Hughes is an energy technology company with a portfolio of technologies and services covering the energy and industrial value chain. The company operates in two segments: oilfield services and equipment and industrial and energy technology. The OFSE segment provides products and services for onshore and offshore oilfield operations throughout the lifecycle of a well, from exploration, evaluation and development to production, rejuvenation and decommissioning. OFSE is organized into four product groups: well construction; completions, interventions and guarantees; manufacturing solutions and subsea and surface pressure systems. The IET segment provides technology solutions and services for mechanical drive, compression and power generation applications in the energy industry, including oil and gas, liquefied natural gas operations, downstream refining and petrochemical markets, as well as lower carbon solutions for the broader energy and industrial sectors.

Stock Market Value: $47.84 billion ($48.48 per share)

Activist: Ananym Capital Management

Ownership: no

Average Cost: no

Activist Comment: Ananym Capital Management is a New York-based activist investment firm founded on September 3, 2024, and is led by Charlie Penner (former partner at JANA Partners and head of shareholder activism at Engine No. 1) and Alex Silver (former partner and investment committee member at P2 Capital Partners). Ananym looks for high-quality but undervalued companies, regardless of industry. They prefer to work amicably with portfolio companies, but are prepared to resort to proxy struggles as a last resort. According to their latest 13F filing, they manage $260 million across 10 positions.

what’s going on

On October 21, Ananym Capital announced that they had taken a position in Baker Hughes and called on the company to spin off its oilfield services and equipment business, arguing that such a move could help boost its stock price by at least 60%.

behind the scenes

Baker Hughes is a leading provider of energy and industrial technology services. The company was formed in 2017 through the merger of the former Baker Hughes and GE Oil & Gas, combining the technical expertise of both organizations with best-in-class intellectual property shared by GE spinoffs.

The company operates in two main segments: industrial and energy technologies and oilfield services and Equipment. The IET unit (55% of projected 2025 revenue and 60% of projected 2025 EBITDA) is a long-term industrial and energy business focused on gas technology equipment, including turbines and compressors, and aftermarket services, including new energy applications. OFSE unit (45%/40%) is a short-term oilfield equipment and production services business with an end-to-end portfolio of oilfield services and equipment for well construction and production.

Management has a strong track record of effective execution and this success is reflected in the share price; The company has achieved strong returns of 28.26%, 75.29% and 232.98% over the past 1, 3 and 5-year periods, respectively.

Within IET, the company has taken advantage of its leading position in LNG, a market where Baker currently has a 95% global footprint for the turbomachinery required in plant construction and is expected to grow at a compound annual growth rate of 10% by 2030.

Additionally, the company also has a strong position in power generation, as Baker is one of the few original equipment manufacturers to provide smaller-scale turbines and complete behind-the-meter power solutions. These offerings allowed the company to play a key role in meeting rapidly growing data center demand, as data center orders grew from $0 to $550 million in just two quarters. Therefore, management is investing heavily in this opportunity by developing larger-scale power systems to support mega data center installations.

Also, Baker’s pending acquisition Graphics Industries IET is expected to further strengthen its position in the energy, LNG and industrial sectors. As a result, IET is approaching 20% ​​EBITDA margin and margin is expected to expand further as the business mix continues to shift towards aftermarket services generating long-term, recurring revenue streams supported by contracts extending over 10 years and margins of 35% or more.

For OFSE, management has taken steps to meaningfully improve the segment’s earnings mix and reduce cyclical commodity risk. This includes exiting or scaling back non-core ventures and low-margin product lines, such as the surface pressure control joint venture with Cactus; prioritizing Middle Eastern and international markets (currently 75% of OFSE revenue) that are less correlated with commodity prices; and implementing strong pricing discipline and cost-cutting measures by imposing minimum margin thresholds on new contracts, consolidating product lines, and simplifying reporting. However, despite these efforts, OFSE remains highly exposed to commodity volatility, which impacts both the segment’s performance and the company’s overall valuation.

Currently valued at around 9x EBITDA, Baker trades more closely with its oilfield services peers (6-7x EBITDA) than its industrial and energy technology peers (16-18x), despite IET accounting for the majority of the company’s revenue and EBITDA. An implied sum-of-the-parts multiple for Baker would put the company at around 13x.

Ananym therefore launched a campaign in Baker calling for the company to either continue to grow IET relative to OFSE or pursue a sale or spin-off of OFSE.

Ananym believes a potential separation could result in an upside of approximately 51% through the realization of Baker’s total part valuation, even assuming synergies from the separation are $100 million. Moreover, this rise does not quite reflect the potential long-term growth tailwinds and margin expansion expected from ongoing operational initiatives; value drivers that shareholders should also be better positioned to realize through such a move.

Founded in September 2024, this is Ananym’s third public activist campaign. Knowing Charlie Penner and Alex Silver as we do, we would expect them to strive to work amicably with management to create value for shareholders. Therefore, they have already expressed their full confidence in management to choose the most appropriate path forward, and the company’s strong operational performance fully supports this confidence.

Also on October 6, the company announced a review of its capital allocation, business, cost structure and operations.

Despite all signs of alignment between the two parties, we do not expect them to insist on, or even demand, board representation or continue to engage in more public campaigns. Instead, we expect them to work amicably with Baker behind the scenes to unlock meaningful shareholder value. However, this collaborative approach should not be perceived as a weakness because they are fiduciaries of their investors and will do whatever it takes to create value in their portfolio companies. Therefore, if the administration does not act decisively, Ananym may quickly shift to a more assertive stance.

Ken Squire is the founder and president of 13D Monitor, a corporate research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of activist investments.