When it comes to providing the technological know-how used in hydraulic fracturing, there are really only three energy stocks investors need to remember. Those would be Halliburton Company (HAL), Baker Hughes Incorporated (BHI) and Schlumberger Limited (SLB). Together, they control almost all of the fracking capacity in the U.S. as well as across the world.
However, come 2015, investors might need to remember just two of those names.
That’s because HAL and BHI might soon be joining forces in one of the biggest mergers between oil services companies in history.
And assuming the merger passes regulatory hurdles, the opportunity for investors in BHI and/or HAL stock is huge … and potentially trouble for those energy stocks the wrong side of the merger.
The Wall Street Journal, citing people familiar with the matter, say that talks between the energy stocks are moving quickly and they could reach an agreement on a buyout price soon. Analysts estimate that the ultimate deal would be a substantial premium to BHI’s $22 billion market cap.
That explains why BHI stock shot-up nearly 18% on the news, but what was strange was that HAL stock also increased by about 3.5%. Usually, the company doing the buying sees its shares fall on the announcement.
Why the difference? Because this has the potential to be one heck of a tie up.
By saying “I do,” the combined company would be a drilling, logistics and well services monster with a market cap of around $67 billion and nearly 140,000 employees. That bulk has some pretty big advantages.
First, it will help Halliburton navigate the continued lower-oil-price environment. As we’ve fracked ourselves silly, there’s a huge glut of West Texas Intermediate crude building. And since we can’t export it and aren’t using it fast enough, prices for WTI have plunged pretty hard over the last few months. Both HAL and BHI have been going at each others’ throats during the price decline to maintain and gain fracking market share, in turn that has hurt profitability on both fronts.
By joining forces, the oil services duo will control more than 39% of the U.S. fracking market — more than double rival Schlumberger’s market share. Perhaps more importantly, the HAL/BHI combo should give them the ability to charge E&P firms higher prices for fracking services — especially in North America.
As for the rest of the world, buying BHI gives HAL an actual global footprint. One of the reasons why Schlumberger is often touted above Halliburton is that SLB is much more of a global oil services firm. North America is a minor (although still important) piece of its overall services pie. On the other hand, HAL is basically a domestic play on fracking and well services.
With the Baker Hughes buy, HAL will be able to expand its global footprint and revenues because BHI already has some global exposure. Being global is important, as being tied to one location can really hurt profitability, as we’ve seen with falling WTI prices and demand for fracking services here at home.
Now, the deal still has its risks. Namely, getting regulators’ stamp of approval. Analysts do predict that HAL will need to sell off some assets to satisfy antitrust concern. Likewise, regulators in Europe, China, Brazil and even Mexico could express concerns over the deal as there aren’t many service companies operating in these nations.
Time to Buy HAL Stock
Given just how big a blockbuster this deal should be, investors might want to snag HAL stock before the deal closes. I’m hesitant to recommend BHI shares as they surged 18% on the news — that actually could be more than what Halliburton eventually ends up paying. Besides, this is just speculation on a potential merger; no one has said “go” yet.
With that said, HAL stock is currently trading for a forward price-to-earnings ratio of just 11. That’s pretty darn cheap, making Halliburton that much more attractive even if a merger doesn’t go through. Besides, HAL will be all right — recent Q3 earnings surged 70% year-over-year, and this quarter should see another 30% growth. Meanwhile, Halliburton also has had enough cash to nearly double its dividend over the past two years.
What About the Competition?
As for SLB investors, I wouldn’t panic just yet.
Schlumberger will still be a bigger company than the combined BHI/HAL and still a dominate force in oil services. If the deal goes through, it’ll be interesting to see what kind of deals SLB pulls to keep growing. That successful subsea joint venture with Cameron (CAM) could lead to a buyout. It’s already done around $27 billion in buyout deals over the last few years.
Even still, I suspect HAL will be the better performing stock of the two based on this.
Now if I owned a smaller pressuring pumping player — like a C&J Energy Services (CJES) or Basic Energy Services (BAS) — I think I’d be a little worried. Two of the sector’s main gorillas are now becoming one.
That’s only going to squeeze these little guys even harder.
As of this writing, Aaron Levitt was long IEZ, which holds all of the stocks listed in this article.