Baker Hughes Could Break Out

Editor's note: When the article below originally posted on Sept. 2, Dan Dicker disagreed with how the stock market was pricing Baker Hughes. He said it would go higher. On Sept. 2, Baker Hughes shares closed at $35.01. On Oct. 7, Baker Hughes' shares stood at $43.67.

The recent picture for Baker Hughes(BHI Quote), the oil service company, gets objectively bleaker all the time.

In those key moments when things don't seem able to get worse, I have found some of the best opportunities to trade. I think we're near one of those moments now with Baker Hughes.

On Monday, Baker Hughes acquired another smaller oil service company, BJ Services(BJS Quote), for a total of $5.5 billion. The market saw this deal poorly, sending Baker Hughes stock down close to 10% to $34.45.

Buy Baker Hughes

Baker Hughes has seen lots of difficulties before this merger, both from competitors as well as from the general state of the oil service market.

BHI, with its $10.5 billion market cap, has always been the third wheel in oil service compared with titans Schlumberger(SLB Quote), and Halliburton(HAL Quote), which sport $65 billion and $21 billion market caps, respectively.

In the fastest-growing international sector for oil service, Baker Hughes has been falling behind those other two monster companies, particularly in the area of integrated project contracts, where a company can be hired to oversee new oil development projects from start to finish.

While Baker Hughes has been lagging, the oil service industry in general has taken it on the chin. Rig counts have fallen dramatically from last year because of the recession, even as oil has crept upwards of $70 a barrel. There's just not a lot of new business to be had, and the competition for what's out there is fierce.