It was a merger made in oilfield heaven. When oil service stock kingpin Halliburton Company (HAL) announced that it was going snag up number three player Baker Hughes Incorporated (BHI), the energy patch cheered. The resulting company would be one of the best plays in the services sector and would be a major force domestically and internationally with regards to all manners of fracking and offshore drilling.
And despite the slip in oil prices, the idea of the deal closing is what drove HAL and BHI’s returns over the last few quarters. “As long as the deal gets done” was the mantra for investors and traders.
Well, continued lower oil prices made fools of us all. And now the Justice Department is throwing cold water on HAL and its buyout plans in a major way.
With the deal looking more and more like it won’t go through, the question now is whether or not HAL stock is still a big buy on its own.
The DOJ Is Coming Down Hard On HAL
Back when HAL and BHI first decided to say I do, the deal was lauded by investors, analysts and market pundits of all stripes. Oil had just begun to fall, and by buying Baker Hughes, Halliburton was positioning itself to be the pressure pumping king.
Combined, the duo would control the vast bulk of fracking services in North America — roughly 40% of the market. As a result, HAL would be able to charge E&P firms more for the same services — especially in the U.S. and Canada.
The deal also gave HAL a much greater presence overseas. Rival Schlumberger Limited. (SLB) has been eating Halliburton’s lunch over the last few years as the much larger oil services firm is in more countries. The diversity of revenue sources — including more state-owned energy firms — has allowed SLB to weather the oil price downturn better than Halliburton.
All in all, the deal would make HAL the undisputed king of fracking … which is part of the problem.
The HAL and BHI combination didn’t come without a huge dose of antitrust concerns. Regulators in Europe, China, Brazil and even Mexico expressed concerns over the tie-up. More importantly, the Department of Justice expressed some big-time concerns.
In order to make it happen, HAL was going to have to sell off plenty of assets — around $7.5 billion worth. Back in December, HAL gave an updated divestiture package to the DoJ to help get the deal done. It turns out, even that hefty $7.5 billion worth of assets and businesses wasn’t enough. According to unnamed sources spoken to by the New York Post, the DOJ now wants HAL to sell around $10 billion worth of assets in order to complete the merger.
The problem is, no one wants to buy the stuff.
General Electric (GE) has been the only reported bidder for divested assets. With oil and natural gas prices in the toilet and the glut of crude still lingering around, many services firms aren’t expanding — they are contracting. That has less and less buyers lining up for HAL’s assets. As if that wasn’t enough, the DOJ still hasn’t given the deal its blessing even if HAL manages to sell the needed businesses.
With that in mind, analysts are now thinking that this deal might be DOA.
Where Does That Leave HAL?
Considering that HAL may not be able to complete the deal, investors have to be wondering where that leaves them. Sadly, in a very distant second place.
While HAL has struggled with consummating its marriage with Baker Hughes, SLB has had no troubles. Schlumberger recently purchased its subsea joint venture partner Cameron International Corporation (CAM) with virtually no worries. That purchase only gave SLB more of a foothold across the globe and strengthened its already strong position with the oil majors and national oil companies.
And SLB’s position would only get bigger if the DOJ actually OK’s the deal. $10 billion is a lot of assets to sell. That number doesn’t take into account some of the other things that the European Union and other governments have considered proposing to HAL. After a while, the amount of stuff it will need to sell off will defeat the purpose of buying Baker Hughes in the first place.
And let’s not forget that Halliburton will be forced to pay $3.5 billion to BHI if the deal doesn’t go through.
Taking a Pass on HAL Stock
With Baker Hughes as originally advertised, HAL would have been an unstoppable pressure-pumping giant. Without it, Halliburton is a tad bit lacking.
There isn’t anything really wrong with Halliburton — it’ll still be the dominant North American fracker. It’s just that Schlumberger is that much better as overall oil services play. It was before hand, and that fact will continue play out if HAL/BHI doesn’t happen.
Halliburton needed Baker Hughes to really compete with SLB on a more global scale. Without it, Halliburton will still be “just” the fracking kingpin of North America. For some investors, that might be enough. But in this age of low oil prices and reduced CAPEX, it might not be enough for HAL to keep going as fiercely as it once did.
The time to take a pass on HAL on the eve of the failed merger could be now.
As of this writing, Aaron Levitt was long VDE, which owns HAL, SLB and BHI.
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