Failed Halliburton tie-up to spur oil deals, cost-cutting
Analysts expect oil prices to edge back up.
The collapse of the proposed tie-up between oilfield services giants Halliburton and Baker Hughes may trigger a wave of consolidation and further cost cutting as the industry reels from low oil prices.
Baker Hughes on Monday announced plans to shed $500 million in costs after the U.S. Justice Department blocked the company’s sale to rival Halliburton on antitrust concerns.
Now, some analysts are anticipating a fresh round of mergers, acquisitions and restructuring to cope with low cash flow from crude oil’s decline. Halliburton and Baker Hughes, however, are viewed as financially resilient enough to ride out the cycle.
“The initial thought was that divestitures from the deal would shape the profile of the industry with many players waiting to see how the process would shake out,” Deutsche Bank analyst Mike Urban wrote in a research note to investors. “With the deal now called off, we believe it could set off a wave of industry restructuring/consolidation.”
Many analysts expect oil prices, now in the mid-$40s a barrel, to edge back to the $50-to$60 range by the second half of the year, but that would still not be enough to make many companies profitable on their own.
Baker Hughes will immediately begin cost-cutting measures.
Halliburton will pay a $3.5 billion breakup fee to Baker Hughes, which will in turn devote $1.5 billion of that to share buybacks and $1 billion to repay debt. The fee is fairly generous and could strengthen Baker Hughes, says Jim Milligan, a natural resource analyst at Olivetree Securities.
Though investors anticipated potential opposition to the tie-up when it was revealed in late November 2014, the government’s exuberant reaction to the merger’s demise underscores the risks big companies face at the altar.
“The hurdle is higher because it’s more of an active DOJ, and the Obama administration is on its way out, so obviously it wants to leave more of a footprint,” Milligan says.
The deal was once valued at $34 billion. Deputy Assistant Attorney General David Gelfand of the Justice Department’s Antitrust Division told reporters the deal “would have harmed energy companies and would have harmed American consumers.”
Baker Hughes shares fell 2% Thursday to $47.40. Halliburton rose 2% to $42.05.
The Obama administration hailed the deal’s demise, trumpeting the growing list of mergers blocked as regulators increase scrutiny of potentially anti-competitive deals. The administration has killed more than 30 “anticompetitive mergers,” Gelfand says. Some 130 mergers have been blocked or altered through settlements such as divestitures.