Now that the merger between Halliburton (HAL) and Baker Hughes (BHI) is officially dead, it’s time for shareholders to begin thinking about what comes next for each firm. While HAL is taking a tough hit to its balance sheet with the enormous $3.5 billion break-up fee to BHI, that figure is actually chump change compared to the equity value that has been destroyed by the oil price swoon. Yet HAL is still standing, still the second largest oil services firm, and still a solid long-term company operating both in the U.S. and abroad. None of that has changed.
Baker Hughes and Halliburton both have promising futures ahead. BHI in particular is the beneficiary of the $3.5 billion breakup fee which gives it the capacity to pay down a substantial amount of debt and buy back shares. Those buy backs could not come at more of an opportune time. BHI and HAL may both have very strong balance sheets at this point, but beyond that the two companies are beginning to diverge in term of their strategy.
On the firm’s most recent public remarks, Haliburton CEO Dave Lesar noted that his company still wants to be thought of as a one stop shop for E&P firms looking to fulfill their OFS needs. HAL appears poised to take other actions in pursuit of that goal after the regulatory slam of the BHI merger. In practice that probably means more acquisitions are in the works either for smaller firms or for pieces of other companies. How risky HAL chooses to get with this strategy is an open question. If Lesner chooses to be aggressive about an M&A strategy, that could mean targeting a firm like Weatherford (WFT), which was once considered a possible successor to BHI as a big 3 OFS firm.
It’s unclear if WFT would be a feasible target for HAL given the regulatory pressure on BHI, but it’s at least not out of the realm of possibility. A more realist target that would likely pass regulatory muster could be Frank’s International or similar niche players in the space. Frank’s makes particular sense given the strong margins of the firm and the limited competition it faces in its spaces (primarily from the larger and broader WFT).
On the other side of the coin, BHI seems to be taking the opposite approach to that of HAL. BHI CEO Martin Craighead indicated in recent talks that his firm prefers to pursue a more specialized business model, including pulling back from some markets that aren’t deemed attractive at this point. Craighead was quoted as saying “There are certain markets where certain product lines frankly aren’t earning their right to play” he said.
Given that approach, it is likely that BHI will be taking a closer look at cost of capital across various business lines and either divesting or shutting down certain operations. Indeed that could lead to the sale of certain operations to HAL, provided those sales pass regulatory muster. BHI now appears poised to be focused on developing and selling new technologies while eschewing the most competitive end markets with the lowest barriers to entry – like U.S. fracking.
Lesner and Craighead at HAL and BHI respectively are pursuing such distinct strategies that it is unlikely both firms are pursuing the optimal strategy for their investors. It’s hard to say at this point who is correct though – if U.S. shale rebounds and OFS margins rise, then HAL is making a prudent decision.
Otherwise, the BHI strategy of shedding less useful assets may prove the wiser course. Either way, there is certainly space for both of these companies, and investors looking for an energy safe haven in the current environment could reasonably consider either firm.
By Michael McDonald of Oilprice.com