Halliburton, Baker Hughes face tough future

If merger fails, both must figure out how to cope with oil downturn solo

Halliburton and Baker Hughes have spent the last 18 months trying to close a $35 billion merger that would have stitched together two of Houston’s oldest and most storied energy companies into the dominant player in North American shale fields. But with a deadline that allows the parties to walk away from the deal coming Saturday, most analysts say it’s almost certain the two will go their separate ways.

That would mark the end of a grand plan to combine the world’s No. 2 and No. 3 energy services companies, and the start of a new future for both firms as they try to navigate the worst oil bust in three decades. In the short term, analysts said, the failure of the merger, which was strongly opposed by antitrust regulators, would mean thousands more layoffs as the companies shut businesses to reap savings they might have gained by merging.

But tougher, long-term questions remain: What will their businesses look like when oil recovers, and

how will they survive in what is expected to be an extended period of low oil and gas prices?

Halliburton faces a huge bill at a particularly trying time for failing to complete the merger by April 30, a date that allows Baker Hughes to walk away from the deal without penalty and collect $3.5 billion. Baker Hughes, which lost nearly $1 billion in the first three months of the year, gets the money, but still finds itself in the unenviable position of being third in the market, well behind two dominant companies, Halliburton and Schlumberger.

“After what could have been two enemies getting together, now you go back to having more competition,” said Matthew Marietta, an analyst at investment group Stephens. “They have to move on from this deal and get their core businesses in line.”

At Halliburton, the company’s core businesses were already widely considered to be among the strongest in the industry. The company has spent the past decade building the premier hydraulic fracturing fleet in the United States, which analysts say can pump water and sand into shale formations more efficiently than any other in the business.

Slashing costs — and jobs Baker Hughes doesn’t have the same kind of marquee business to lean on as the oil industry recovers. But analysts say the company could invest the breakup fee in fresh equipment to make its fracking business competitive by the time prices recover.

“Baker Hughes has cash, and they’ve got options,” said Rob Desai, an analyst who follows the company for financial services firm Edward Jones.

The history of the two Houston companies reaches back to the early days of Texas’ oil rush in the first decades of the 20th century, introducing new products, services and innovations that helped make Texas and Houston the energy capital of the world. When the companies agreed to merge in November 2014, executives hoped the new company would have the size and scale to compete with the international giant Schlumberger. But the Justice Department, concerned the combination would stifle competition and give Halliburton too much power over pricing, held up the deal, ultimately suing to block it on April 6.

As the process dragged on, oil prices collapsed, falling from $75 per barrel when the merger plan was unveiled to just over $45 per barrel today. The number of active drilling rigs plunged to just 343 from more than 1,600.

Both companies make money by offering exploration and production firms a range of services from drilling wells to analyzing geology. As drillers cut back, profits at contractors vanished.

Halliburton last Friday delayed its earnings report until May 3, but announced that its first-quarter revenue fell to $4.2 billion — from $7.05 billion in the same period last year — and that it cut another 6,000 jobs in the first three months of 2016. Baker Hughes reported that its first-quarter revenue plunged more than 40 percent, to $2.7 billion from $4.6 billion in 2015, and its losses widened to $981 million. Both companies have tried to stop the bleeding by cutting costs and jobs as dramatically as revenues have fallen.

Halliburton in better shape The long period of uncertainty as they pursued the deal hurt both companies, limiting how they could respond to the crisis.

Halliburton, for example, held on to office support staff — lawyers, accountants and middle managers — and some assets in the field that it would need to manage a larger business.

Baker Hughes also has kept its businesses larger than they otherwise would be, estimating that it carried an extra $110 million in costs in the first quarter to comply with the terms of the merger. If the deal fails, analysts expect those positions to be cut quickly. It isn’t clear how many workers could be cut, but analysts’ estimates range from hundreds to the thousands.

Many of Halliburton’s businesses are in better shape, and the company isn’t expected to cut quite as deeply. Halliburton will be $3.5 billion poorer after it pays the breakup fee, but it still has plenty of cash, analysts said.

Baker Hughes needs the money, analysts said. Much of its equipment needs to be refurbished, and it could plow that money into new equipment to become more efficient, said Robin Shoemaker, who tracks the company for KeyBanc Capital Markets, an investment bank. Investors will be waiting to hear the plan, Shoemaker added.

“They have been not communicating with their investors during this one-and-a-half years since this deal was announced,” he said. “What Baker Hughes has to do, next week at the latest, is come out and lay out a plan.”

Baker Hughes might also become a target of a new buyer. GE Oil & Gas, a unit of General Electric Co., has long been rumored to be interested in buying it.

“They’re obviously trying to build an oil and gas business,” said Darren Gacicia, an analyst with banking firm KLR Group. “It just depends on how grandiose they want to be.”