It was supposed to be a match made in oil services heaven. Two years ago when pressure-pumping kingpin Halliburton Company (HAL) approached smaller rival Baker Hughes Incorporated (BHI) about combining, the deal was lauded far and wide for the synergies. Together, the duo would have been one of the largest forces in fracking, well completion and oil services technology.
Perhaps, however, the BHI and HAL combo would have been too good.
Since the merger announcement, the combination of the number two and three players in energy services has come under major scrutiny from various governments, regulators and antitrust bodies. And it seems that those inquiries became too big to bear.
Both HAL and BHI have decided not to combine.
So where does that leave both Baker Hughes and Halliburton? For one, this could lead to other opportunities. For the other, it has fallen against its bigger rival.
What Happened at HAL and BHI?
The main argument for BHI and HAL joining forces was that the combo would be an unstoppable force in pressure pumping and fracking. By adding Baker Hughes to its mix, Halliburton would control a bulk of fracking services in North America. By having roughly 40% of the market under its belt, HAL would have been able to charge E&P firms more for the same services — especially in the U.S. and Canada.
The deal would have also giving the pair a commanding lead in overseas and international fracking and well completion markets.
But that was also the problem.
Oil firms complained in abundance and the deal was met with heavy opposition from regulators. Antitrust authorities in Europe, China, Brazil and Australia expressed concerns over the tie-up. Baker Hughes and Halliburton agreed to sell off several divisions in order to comply with the wishes of regulators.
However, that wasn’t enough for the Department of Justice. They wanted Halliburton to sell off more than $10 billion in Baker Hughes assets. And while HAL tried to work with the DOJ, the department in recent weeks had announced that they would threaten to sue in order to block the deal.
Under such immense regulatory pressure, both BHI and HAL stock decided that combining wouldn’t be worth the effort. The pair announced this morning — after Halliburton delayed announcing earnings last week — that the megadeal was off.
BHI or HAL? Which is Better Now?
Given just how great the merger would have been for the two oil service stocks, the letdown is pretty great. Combined, the two would have been a real force to reckon with and would have given number one player Schlumberger Limited (SLB) a run for its money.
For Halliburton, the deal was more of a necessity. HAL’s problem has been that it was predominately a North American provider of services. And as we know, the record low prices for WTI crude oil haven’t exactly done it any favors. CAPEX spending in America’s shale fields continues to plunge and HAL estimates that 2016 will see a 50% drop in well and completion CAPEX. That follows last year’s 40% drop.
As a result, HAL continues to see huge revenues declines. And while the oil services stock has focused on cost controls, you can only cut so much.
In the end, Halliburton needed Baker Hughes in order to expand its reach beyond U.S. borders and get it into the hands of state-owned international oil firms that have a different mandate than just profits from their pumping.
For Baker Hughes, the merger was a benefit, but not the only game in town. As the smallest of the three players, BHI holds a unique position and could still very well be on the merger block … and an unexpected firm could be the buyer.
General Electric Company (GE) has quietly become one of the largest oil services and technology firms in the country. Over the last 10 years, it has plowed more than $10 billion into deals in the energy patch.
Already, GE was eyeballing some of the assets that would have been spun-off from Halliburton and Baker Hughes if the merger were to be completed. With the merger out of the way, several analysts have speculated that GE could go elephant hunting into BHI stock.
And with more than $160 billion in planned or completed asset sales in order to free itself from GE Capital, General Electric could very well have enough firepower to finance such a deal for BHI.
Even better is that many analysts predict that the deal wouldn’t come under fire from regulators as GE doesn’t have any pressure-pumping exposure. This is totally a new market for GE and would instantly vault it into the top three.
While the deal is purely speculation at this point, it could very well happen and make BHI stock investors happy. In the meantime, the $3.5 billion in cash that Baker Hughes is getting from Halliburton thanks to the called off merger is going to be plowed into buybacks.
BHI Could Be a Buy
With the deal off, I’m more inclined to buy BHI stock over HAL. The potential for Baker Hughes to succeed as a part of GE is certainly there. And as the smaller of the two players, its demonstrated willingness to be acquired could mean that new deal could happen.
GE rival Siemens AG (ADR) (SIEGY) was another possible suitor for HAL/BHI’s assets.
As for HAL stock, it really needed the deal to compete with SLB. It’s not a bad firm by any means, it’ll just be in second place for a long time.
As of this writing, Aaron Levitt did not hold a position on any of the aforementioned securities.