With crude oil prices still refusing to break the $40/bbl mark, traders continue to debate the timing of the ultimate bottom for this cycle. Many longer-term investors, however, are focusing on which oilfield services company will emerge as the market leader once the recovery begins: Halliburton Company (HAL) or Schlumberger Limited. (SLB).
Both HAL and SLB Are Hurting
First of all, neither HAL or SLB looks like a compelling value play in the near-term. Capex in the oil space has screeched to a halt as the entire industry is now hunkered down and trying to weather the storm. While analysts are calling for a coming slew of bankruptcies among exploration & production companies and offshore drillers, HAL and SLB both seem relatively well-positioned from a financial standpoint.
Although neither company is profitable as of Q4 of 2015, they both still pay generous dividends to the tune of 2% and better. In addition, both Halliburton and Schlumberger feel good enough about their long-term financial outlook to have attempted extremely aggressive acquisitions during the downturn. HAL agreed to buy Baker Hughes Incorporated (BHI) for $34.6 billion back in November of 2014, while SLB agreed to acquire Cameron International Corporation (CAM) for $14.8 billion in August of 2015.
Reshaping HAL and SLB
Those two buyouts provide both the biggest bull case and one of the major distinctions between the two companies as they stand today. The SLB buyout of CAM would create a combined entity with a market cap of around $108.5 billion. However, despite the company’s massive size, the deal received unconditional acceptance by U.S. and European regulators. The two companies offer complementary product lines and their union would not eliminate competition in the market.
The HAL buyout of BHI, on the other hand, is an entirely different beast. On the surface, the combined company’s size of just over $50 billion doesn’t immediately raise any red flags. However, rather than expanding its business by acquiring a company with a complementary product or service, HAL is instead attempting to buy out one of its largest direct competitors while the price is cheap. That’s one of the major reasons why the deal has hit so many regulatory snags. In fact the two companies will likely end up divesting overlapping businesses that accounted for anywhere between $5.2 and $10 billion in revenue per year prior to the downturn.
Even with these proposed divestitures, the fate of the deal was still up in the air as of the end of January.
Oilfield Services Outlook
It’s unlikely that HAL will ever fully realize the initial $2 billion in synergies that it suggested when it first proposed the BHI deal. But if it closes, it will still be a major feather in the cap of the company. In fact, last year analysts at Citi Research projected that HAL stock had upside as high as $76 per share by mid-2018. That price represents more than 110% upside from the stock’s current share price.
On the other hand, in February, Susquehanna called SLB the “best-positioned company to weather the drilling downcycle” among all oilfield services stocks. The firm sees 17% upside for the stock within the next 12 months.
Takeaway
For patient investors that believe that a recovery in oil prices is coming sometime in the next one to five years, both SLB and HAL will likely both pay off big eventually. With its acquisition of CAM all but closed, SLB seems to be the safer play of the two.
HAL appears to offer more risk and more potential reward at the moment. With so much time, energy and money already invested in the BHI deal, it’s likely that HAL will do whatever it takes to eventually get the deal accepted by regulators in some form. Exactly what form the final deal will take and what will be left of the two companies when it finally closes remains to be seen.
As of this writing, Wayne Duggan was long HAL and SLB.
