Oilfield Services Weekly Notes: A Big Merger, Idled Offshore Rigs And An Uncertain Outlook

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The oilfield services industry had a very eventful week, with Halliburton (NYSE:HAL) announcing a blockbuster deal to buy smaller rival Baker Hughes (NYSE:BHI) in what would be the largest acquisition in the industry’s recent history. In other news, Transocean (NYSE:RIG), the biggest offshore driller, painted a grim picture of the offshore drilling markets in its recent fleet status report, indicating that it had idled 3 rigs and added just $83 million in new contracts since its previous report . On the macro front, things continue to remain nebulous for the upstream energy services sector. While benchmark crude oil prices saw a marginal increase this week, with NYMEX crude creeping above $76 per barrel on Thursday, prices are still down by around 30% since mid-June, amid concerns of abundant global supply and lackluster demand growth. Crude prices are a barometer for long-term upstream spending activity, and if prices continue to remain depressed, oilfield services companies could see demand fall as oil and gas companies dial back on their exploration and production spending.

Halliburton Buying Baker Hughes

Halliburton, the second largest oilfield services company, will acquire Baker Hughes, the third largest player, creating a services behemoth that could take on industry leader Schlumberger (NYSE:SLB) in a market in which customers generally prefer firms with broad technological capabilities and wide geographic footprints. The stock and cash deal, which values Baker Hughes’ equity at $34.6 billion or $78 per share as of November 12, represents a 50% premium to the stock price before the news of the negotiations between the companies became public. The transaction is expected to close during the second half of 2015, subject to the approval of shareholders from both companies and regulators. The market reaction to the deal was decidedly mixed, with Halliburton’s stock falling by over 10% since the deal was announced, marking one of the worst performances by an acquirer’s stock this year. Baker Hughes’ shareholders appear to be on the more lucrative side of the transaction, at least from a near-term perspective, considering the healthy cash component and the upside they could realize through stake in the combined company. Although Halliburton may not see a short term upside from the deal, it should gain over the long run since it could realize synergies, expand its product portfolio in areas such as artificial lift, horizontal drilling, drill bits, and strengthen its geographic footprint (see Why The Baker Hughes Deal Will Eventually Create Value For Halliburton Shareholders).

  • We have a $70 price estimate for Halliburton, which translates to a market cap of around $59 billion. Our price estimate is 41% ahead of the current market price. We project the company’s FY 2014 revenues at around $32 billion, with an adjusted EPS of $4.05. This compares to a consensus EPS estimate of around $4.04 according to Reuters.
  • Halliburton’s stock declined by over 10% through Thursday, on the back of concerns that it was paying too much for Baker Hughes.

Transocean’s Grim Fleet Status Report

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Transocean published its fleet status report for November, reporting significantly lower contracting activity, lower day rates on new contracts while indicating that it had idled three more rigs. The drilling markets are facing a cyclical downturn, as plummeting oil prices compound the impact of the industry-wide oversupply of ultra-deepwater drilling rigs. Transocean has been badly impacted by this, given its older fleet and also due to a larger number of contracts that expire (or expired) this year. Per the fleet report, the company added new contracts valued at just $83 million since October 15, compared to about $610 million worth of contracts reported in its previous monthly report. Day rates on most new contracts were also lower. For instance, the Discoverer Enterprise ultra deepwater rig was awarded a one-well extension at a dayrate of  $399,000, compared to a previous day rate of $615,000. The company also announced that it would be idling two ultra-deepwater floaters – Deepwater Discovery and Sedco Express – and one midwater rig- GSF Arctic III.  ((Fleet Status Report November 2014, Transocean))

  • Trefis has a $34 price estimate for Transocean, which translates into a market cap of $12.3 billion. Our price estimate is about 32% ahead of the current market price. We are forecasting revenue of around $9.23 billion for 2014.  Reuters has a consensus EPS estimate of about $4.66 for FY 2014.
  • Transocean’s stock has declined by 2% thus far this week.

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