Oil Mergers: Schlumberger Versus Halliburton, Part 2

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Due to the plummeting commodity prices, oil and gas companies have been actively resorting to merger and acquisitions (M&A) to weather this down cycle. However, the synergies derived from these deals may vary due to the timing and size of the deals. Thus, in this series of articles, we are trying to compare two of the recently proposed mergers in the oilfield services industry — Schlumberger-Cameron and the Halliburton-Baker Hughes merger. In the last article of this series (Schlumberger-Cameron Deal Versus Halliburton-Baker Hughes Merger – Part 1), we differentiated the two deals on the basis of their rationale and value derived by the merged entities. In this article, we will elaborate on the antitrust issues related to the deals and how they can prove to be a deal breaker for the companies involved.

SLB-1year price

Source: Google Finance

The Deal Breaker – Antitrust Clearance 

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As described in our previous article, the Halliburton-Baker Hughes merger is expected to increase the dominance of the combined entity in some of the key markets in the oilfield industry. For instance, the merged company would hold a 36% share in the pressure pumping market, 48% of the completions equipment and services market, and 49% of the market for cementing services. However, as expected, this has triggered antitrust concerns since the contraction of the industry is likely to hamper competition and result in higher prices for the customers. Before moving forward, let’s quickly look at the key concerns raised by the various regulatory agencies regarding this merger.

Firstly, the European regulators believe that Halliburton has been using its dominant position in the market to offer price concessions to the customers in the oil and gas industry. Given the depressed commodity prices, this has created an unfair advantage for the company, as smaller energy services companies, who are losing money due to the weak oil and gas prices, are struggling to cope with Halliburton’s prices. The antitrust authorities fear that post the merger, Halliburton’s position in the market will strengthen further, which will worsen the pricing pressure in the industry. This will force the smaller players to exit the market, thereby reducing competition in the industry. Similarly, the Australia Competition And Consumer Commission (ACCC) has been questioning the possibility of coordinated behavior in the oilfield industry post the merger. Lastly, the US Department of Justice’s (DOJ) antitrust department, too, is concerned about the higher bargaining power that will be enjoyed by Halliburton post the merger.

See Our Complete Analysis For Halliburton Here

In order to obtain the regulatory clearances, Halliburton and Baker Hughes have been working closely with these agencies to meet the antitrust requirements. For instance, Halliburton had announced the sale of its drilling services and drilling bits businesses, generating estimated revenues of $7.5 billion, in April of this year. But, the company felt that the sale of these assets may not be sufficient to receive regulatory clearance for the deal. So, the company, together with Baker Hughes, announced the sale of additional assets worth $5.2 billion, to be completed within the deadline of completing the merger, which is the 16th of December 2015. Under the additional sale, Halliburton plans to divest its expandable liner hangers business, while Baker Hughes will shed its core completions business (packers, flow control tools, and subsurface safety systems), its sand control business in the Gulf of Mexico, and its offshore cementing businesses in Australia, Brazil, the Gulf of Mexico, Norway, and the UK.  Despite these proactive efforts by the two companies, it is unknown if the deal will pass the antitrust barriers within the stipulated timelines.

HAL-milestones

Source: Halliburton’s presentation at Wells Fargo Securities 2015 Energy Symposium, December 2015

In contrast, Schlumberger and Cameron cater to different markets and clients, and have complementing businesses rather than overlapping products. Thus, their union is more focused at diversification of operation as opposed to eliminating competition. This is a key reason why the deal received an unconditional approval from the US DOJ within three months of its announcement, while the Halliburton merger is still waiting for a green light from antitrust departments in many countries, a year after the merger announcement. With Schlumberger receiving a go ahead from the regulatory authorities, investor confidence in the Halliburton-Baker Hughes deal has started shrinking. The market believes that even if the deal passes the antitrust hurdle, the combined entity may lose some of its high revenue generating assets, which could reduce the cost synergies that the deal is anticipated to bring. As a result, the stock price of Baker Hughes is currently trading at $53 per share, representing a discount of 14% to its implied merger value of close to $62 per share (1.12 HAL share plus cash of $19 per share). On the contrary, Cameron is trading at almost $65 per share, which is closer to its implied merger value of $66 per share (0.716 SLB share plus cash of $14.44 per share).

SLB vs HAL

Despite the uncertainty attached to the regulatory approvals, Halliburton is committed towards completing the merger. Last month, the company issued a total of $7.5 billion senior notes of debt, to be raised in five tranches spread over the next 30 years, to finance the merger with Baker Hughes. On comparing the balance sheets of Halliburton and Schlumberger, we observe that the former has a debt-to-equity ratio of almost 47% (excluding the new debt), which is more than twice of that of Schlumberger. Hence, any additional debt will prove to be an added burden on Halliburton’s balance sheet, which may be viewed as a negative by investors.

HAL-fin

 Source: Company filings (10Q)

If the market fears become a reality and the deal does not receive the necessary approvals by the end of this year, Halliburton still has an option to extend the deadline to complete the merger to 2016. However, if the worst happens and the merger completely falls apart due to antitrust issues, the company will be obligated to pay a sum of $3.5 billion to the shareholders of Baker Hughes. Since the company does not have enough cash (at least at the end of third quarter), it may have to use some portion of its newly issued debt to pay back this obligation. This could weaken the company’s stock as investors could see this as a potential downside to their investment in the company.

HAL-focus

Source: Halliburton’s presentation at Wells Fargo Securities 2015 Energy Symposium, December 2015

In the light of our discussion, we conclude that while the Cameron deal is likely to create value for Schlumberger, the fate of the Halliburton-Baker Hughes deal is dependent on the US and Australian antitrust review results, expected to be out by mid-December.

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