If Halliburton Co's bid to buy Baker Hughes fails, it may spark a scramble for deals among beaten-down oil services firms.
US antitrust officials have prepared a lawsuit to stop the merger of the world's second and third-largest oilfield companies, according to a person familiar with the matter. The lawsuit, which may be filed as early as this week, claims the deal violates antitrust laws by eliminating competition between the firms, said the person, who asked not to be named because the investigation is confidential. An offer by Halliburton and Baker Hughes to sell assets to resolve the government's concerns wasn't satisfactory, the person said.
If the deal does collapse, Halliburton and Baker Hughes are expected to shop for smaller rivals struggling during the worst crude market crash in a generation, with Oceaneering International Inc and Flotek Industries the most attractive targets, said Matthew Marietta, an analyst at Stephens in Houston. It also may open the door for an equipment maker such as General Electric to expand into the services field, according to industry consultant Spears & Associates. Oilfield service providers were the first to feel the pain as oil prices tumbled more than 70 per cent. The sector continues to be most heavily affected after customers slashed more than $100 billion in spending last year and promised more cuts for this year. The Halliburton-Baker Hughes deal, valued at almost $35 billion, in November 2014, is now worth less than $25 billion, according to data compiled by Bloomberg.
The company's profit margin in North America was reduced by three to four percentage points because of extra costs it was incurring in anticipation of the merger, Christian Garcia, Halliburton's interim chief financial officer, said in a fourth-quarter earnings call.
Halliburton's first priority probably will be to identify departments and personnel that it kept to accommodate assets and services it was expecting to acquire in the merger, said Robin Shoemaker, an analyst at Keybanc Capital Markets Inc. "Halliburton probably goes into a major cost-cutting and downsizing."
If Halliburton moves on to other targets, Oceaneering is one of the most enticing, thanks to its leading position in the remotely-controlled robots used to inspect and repair equipment installed atop deepwater oil wells on the sea floor, Marietta said. With a $3 billion market valuation, the company also has robust free cash flow, he said.
"Its technology-focused product line is what differentiates the company from a lot of dumb iron out in the oil patch," said Marietta, who initiated coverage of Oceaneering on Tuesday with the equivalent of a buy rating. Flotek provides specialised fluids used in fracking wells, with Halliburton already one of the biggest customers, Marietta said.
GE Oil & Gas, one of the largest US makers of oilfield equipment, would be expected to launch a bid for Baker Hughes, according to Spears & Associates. In December, GE was said to be exploring bids for various assets Halliburton was seeking to sell in an attempt to secure approval for the deal from the Justice Department.
"If GE was interested in parts of Halliburton, then they should be interested in all of Baker Hughes," Richard Spears, vice president at Spears & Associates, said . "It would be simpler in that the things that overlap are fewer and of less consequence, and therefore any pushback they got would be limited to very definable, small little pieces."
Spokesmen for Baker Hughes, Halliburton and GE declined to comment. Representatives for Flotek and Oceaneering didn't immediately return phone or e-mail messages left after normal business hours.
Before turning their sites on other potential targets, Baker Hughes and Halliburton will have to communicate brand-new growth strategies to investors, said Shoemaker.
"The first order of business for Baker Hughes will be to resurrect the franchise," Shoemaker said in a telephone interview from New York. "Management will need to go back and put together a credible plan for how they're going to compete."
US antitrust officials have prepared a lawsuit to stop the merger of the world's second and third-largest oilfield companies, according to a person familiar with the matter. The lawsuit, which may be filed as early as this week, claims the deal violates antitrust laws by eliminating competition between the firms, said the person, who asked not to be named because the investigation is confidential. An offer by Halliburton and Baker Hughes to sell assets to resolve the government's concerns wasn't satisfactory, the person said.
If the deal does collapse, Halliburton and Baker Hughes are expected to shop for smaller rivals struggling during the worst crude market crash in a generation, with Oceaneering International Inc and Flotek Industries the most attractive targets, said Matthew Marietta, an analyst at Stephens in Houston. It also may open the door for an equipment maker such as General Electric to expand into the services field, according to industry consultant Spears & Associates. Oilfield service providers were the first to feel the pain as oil prices tumbled more than 70 per cent. The sector continues to be most heavily affected after customers slashed more than $100 billion in spending last year and promised more cuts for this year. The Halliburton-Baker Hughes deal, valued at almost $35 billion, in November 2014, is now worth less than $25 billion, according to data compiled by Bloomberg.
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Halliburton has more than $10 billion in cash after selling $7.5 billion in notes late last year to finance the cash portion of the proposed deal. It would need to redeem about $2.5 billion of those notes if the deal falls through, as well as pay a $3.5 billion termination fee to Baker Hughes.
The company's profit margin in North America was reduced by three to four percentage points because of extra costs it was incurring in anticipation of the merger, Christian Garcia, Halliburton's interim chief financial officer, said in a fourth-quarter earnings call.
Halliburton's first priority probably will be to identify departments and personnel that it kept to accommodate assets and services it was expecting to acquire in the merger, said Robin Shoemaker, an analyst at Keybanc Capital Markets Inc. "Halliburton probably goes into a major cost-cutting and downsizing."
If Halliburton moves on to other targets, Oceaneering is one of the most enticing, thanks to its leading position in the remotely-controlled robots used to inspect and repair equipment installed atop deepwater oil wells on the sea floor, Marietta said. With a $3 billion market valuation, the company also has robust free cash flow, he said.
"Its technology-focused product line is what differentiates the company from a lot of dumb iron out in the oil patch," said Marietta, who initiated coverage of Oceaneering on Tuesday with the equivalent of a buy rating. Flotek provides specialised fluids used in fracking wells, with Halliburton already one of the biggest customers, Marietta said.
GE Oil & Gas, one of the largest US makers of oilfield equipment, would be expected to launch a bid for Baker Hughes, according to Spears & Associates. In December, GE was said to be exploring bids for various assets Halliburton was seeking to sell in an attempt to secure approval for the deal from the Justice Department.
"If GE was interested in parts of Halliburton, then they should be interested in all of Baker Hughes," Richard Spears, vice president at Spears & Associates, said . "It would be simpler in that the things that overlap are fewer and of less consequence, and therefore any pushback they got would be limited to very definable, small little pieces."
Spokesmen for Baker Hughes, Halliburton and GE declined to comment. Representatives for Flotek and Oceaneering didn't immediately return phone or e-mail messages left after normal business hours.
Before turning their sites on other potential targets, Baker Hughes and Halliburton will have to communicate brand-new growth strategies to investors, said Shoemaker.
"The first order of business for Baker Hughes will be to resurrect the franchise," Shoemaker said in a telephone interview from New York. "Management will need to go back and put together a credible plan for how they're going to compete."