It’s been a great few weeks for those of you lucky to be invested in the stock market; indexes continue to hit all new highs, oil prices continue to decline along with gas prices, giving people the freedom to actually drive somewhere without paying out half your paycheck for gas. And merger and spinoffs are in the air, Hasbro’s talk of taking over DreamWorks, Halliburton attempting to take over Baker Hughes, throw in the successful IPO of Virgin America and everything seems to be great. But as someone who has investments in the oil services industry the takeover talk about Halliburton and Baker Hughes has fascinated me.
First of all Halliburton (the company behind numerous conspiracy theories and supposedly the beneficiary of Dick Cheney’s policies) is one of the largest companies in the world with a market cap of over $46 billion. The company is the 2nd largest oil services company by revenue being placed just behind Schlumberger. The company is reported to be in talks with competitor Baker Hughes (a remnant of the once proud Hughes empire, owned by reclusive billionaire Howard Hughes), the 3rd largest oil services company, Baker Hughes, is considerably smaller than Halliburton, with a market cap of $25.9 billion.
Baker Hughes reported though that talk between the two oil service giants had stalled and that Halliburton was seeking to replace the entire board of Baker Hughes at the next shareholders meeting in April. Since Baker Hughes puts its directors up for reelection every year this provides an opportunity for Halliburton to take control in one swoop. With that said there are a considerable number of factors to consider before you could cheer a possible merger or buyout.
First, you have to consider government anti-trust laws. A combined Halliburton and Baker Hughes would be the largest company in the industry with a market cap of over $70 billion, the combined company would control some 25% of the market for oil services and use this power to squeeze smaller competitors out of business, or at least that is what regulators will likely say. Also if Halliburton does turn to a hostile takeover, as it appears it has, it would be harder to convince regulators to agree to the deal. I will not make any prediction on the likelihood of a deal occurring or not, my objective is to determine whether or not a combined Halliburton and Baker Hughes would make a good investment.
To find that out it is necessary to consider the oil services industry as a whole. First of all oil services is an industry that helps out oil companies such as Exxon and Chevron explore for oil and natural gas and provides equipment to do so, rigs are a good example of a service oil service companies such as Baker Hughes and Halliburton provide. The industry has been on an upswing these last few years as the shale oil boom has benefited the energy sector. Companies like Halliburton have made billions providing the tools in this new energy boom, and the increase in there stock reflects that (in 2012 Halliburton stock increased almost 40%). In recent months though as oil prices have plummeted from $100 a barrel to under $75 a barrel shares in oil service companies have fallen sharply, in the last 3 months Halliburton stock has fallen some 20%.
The falling stock prices at Halliburton and some of its competitors may present an opportunity, since they would naturally go up when oil prices rebound. This is probably the reason Halliburton is making a bid for Baker Hughes, to take advantage of the lowered market price. With that said, investors who see value in the oil services industry should beware, many divisions and companies in this sector are in danger of surviving into the future. A perfect example is ocean rigs; these are rigs that search and drill for oil in the oceans. This process was great when oil prices where high since the process is quite expensive but recently as oil prices have plunged ocean drilling has fallen out of favor, this has caused stocks in ocean drillers such as Transocean and Ensco to collapse. Baker Hughes and Halliburton both have ocean drilling divisions which will suffer without a doubt if oil prices remain low, but investors who are determined that oil is bound to rebound buying into large oil service companies might be an attractive preposition.
The oil service industry is also under threat from new advances from drilling which allow companies to extract more oil from fewer drills. Another possible problem is that with the energy boom many newcomers have joined the space, including some other large corporations; this increase in competition will eventually hurt the big names like Halliburton.
As for Baker Hughes and its proxy battle with Halliburton there is a possibility that the 3rd largest oil service company will actually see its stock go higher (even higher than it already has gone, the stock rallied 15% on Thursday as the Halliburton buyout was announced). The reason for this enthusiasm is that other companies might make a bid for Baker Hughes since many see potential in the energy boom and see depressed oil prices as a potential buying opportunity. So if you are one of those oil bulls, oil service companies and specifically Baker Hughes might be a good buy for you.
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