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.
IN THE NEXT FEW
MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY
STOCK TIPS AND POTENTIAL OPPORTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES
ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
IF YOU HAVE IDEAS FOR
THE NEW WEBSITE PLEASE COMMENT
ALSO COMMENT ABOUT
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THANK YOU
