Separate futures being charted
Halliburton strategy ‘hasn’t changed’ but Baker Hughes plans major shift
Two companies with deep roots in Houston’s energy economy on Tuesday laid plans for a future without each other in the uncertain world of oil field services.
Halliburton and Baker Hughes have ended a costly 18-month engagement, leaving Baker Hughes to make sweeping changes and Halliburton to pay a $3.5 billion breakup fee.
“Halliburton is continuing on the path they’ve always been on,” said Bill Herbert, an analyst at an energy-focused division of investment bank Piper Jaffray. “Baker is trying to reinvent itself. And frankly, it needs to.”
At Halliburton, the world’s second-largest oil services company behind Schlumberger, the breakup fee will take a bite out of the balance sheet, but otherwise executives said they expect to make few changes. The company’s red coveralls are a staple in the oil patch, and its workers are considered the best at hydraulic fracturing, or pumping water and sand into shale to unlock oil and gas.
Halliburton plans to use that business and its international reach to survive the downturn, then thrive during the recovery.
Baker Hughes, however, an-
nounced major changes. The No. 3 services contractor will now seek to find the profit it couldn’t get through size and scale by specializing in high-tech, high-margin businesses.
CEO Martin Craighead said the company will remove its high-pressure pumping business from all but the two most profitable U.S. shale basins. Internationally, Craighead said, the company will seek to sell its equipment to local service contractors rather than maintaining its own infrastructure across the globe. He offered few specifics.
“We’re getting back to our core, which is innovation,” he said during a call with investors on Tuesday.
The future of these companies is critical to Houston, where they employ thousands of people. Around the globe, Halliburton employs more than 55,000 and Baker Hughes employs 39,000. Both companies have said they planned to cut workers if the merger failed, and would have almost certainly cut workers if the merger had gone through.
The deal that Halliburton and Baker Hughes walked away from was once valued at $35 billion, but when federal regulators sued to block the union, it couldn’t be closed on deadline.
Halliburton has come out of the deal relatively healthy. Its largest setback is that it won’t be able to narrow the gap between the size of its operations and those of industry leader Schlumberger.
“If we had been successful, adding the Baker Hughes assets would have given us that scale quickly,” Halliburton CEO Dave Lesar said on a Tuesday conference call. “But our strategy has not changed.”
Analysts expect Halliburton can pay the fee without incurring serious damage to its finances. The company reported it will still have $6.6 billion in liquidity after paying the fee.
That’s not to say the company hasn’t suffered from cheap oil. Halliburton on Tuesday reported a loss of $2.41 billion in the first quarter, including a $2.1 billion non-cash charge primarily for asset impairments and severance costs. It also booked $378 million in charges related to its failed acquisition.
Baker Hughes has struggled with low oil prices while the company’s very existence sat in limbo.
In the first quarter of 2016, Baker Hughes reported that its revenue fell by more than 40 percent to $2.7 billion, down from $4.6 billion in the first quarter of 2015. The company reported a loss of $981 million. About $110 million of its costs in the period were due to the pending merger.
On the call with investors, Craighead said the key objective was cutting costs and securing profit margins in the short term.
But the company has deep pockets and will be made even richer by the roughly $3 billion in after-tax cash it’s due from Halliburton as part of the merger agreement. Baker Hughes has said it plans to use the windfall to buy back $1.5 billion in shares and retire $1 billion in debt.
“Baker Hughes has cash, and they’ve got options,” said Rob Desai, an analyst who follows the company for financial services firm Edward Jones.
On Tuesday, Baker Hughes executives reiterated that they plan to eliminate $500 million in annual costs by the end of 2016 — industry code for layoffs. The company has already shrunk to about 39,000 employees from a peak of more than 62,000. Those cuts will come initially from divisions where executives had stayed cuts in anticipation of the merger.
Additional cuts will come as the company pulls its fracturing crews out of all but the two most active U.S. shale plays. Executives didn’t specify which plays, but analysts said they were Texas’ Permian and Eagle Ford shales.
Baker Hughes’ retreat is a major reversal for a company that stormed into shale fracturing in 2009 with a $5.5 billion acquisition of competitor BJ Services Co. The acquisition helped Baker Hughes build one of the five largest U.S. high-pressure pumping businesses, which at the height of the boom accounted for about a third of the company’s revenue, said Herbert of Piper Jaffray.
But Baker Hughes never quite managed to squeeze as much profit from fracturing as its competitors, Herbert said. It struggled to build the same shipping logistics and efficient equipment that has helped Halliburton keep its fracturing costs low, he said. In the first quarter of 2016, Baker Hughes said its pressure-pumping business was losing market share and struggling to generate more cash than it cost to run.
Another drastic shift is coming in Baker Hughes’ international oil services business, where Craighead said the company would transform itself from trying to provide a slew of services into specializing in manufacturing some of the hardest-to-make oil equipment. Craighead said Baker Hughes could then sell its technology to local service providers.
Rather than a direct competitor in many international markets, Baker Hughes plans to eventually shift toward being a “supplier to a broader set of customers,” Craighead said. “That’s a dramatic shift, one that you’ve never heard before from any of the big three service companies.”
Such a pivot would help Baker Hughes transition away from competing directly with Halliburton and Schlumberger, said Robin Shoemaker, who follows the company for KeyBanc Capital Markets. But it could also leave Baker Hughes working with service providers in countries such as Saudi Arabia and Iraq, where their customers could be less reliable, he said.