How Will The Halliburton-Baker Hughes Deal Impact Halliburton’s Credit Capacity?
The US Department of Justice (DoJ) filed a civil antitrust suit to block the $35 billion Halliburton-Baker Hughes deal on Wednesday, April 6th, 2016. The merger, a combination of the No. 2 and No. 3 oil services companies in the industry, is likely to curb free competition in almost 20 business lines in the global well drilling and oil construction industry. While the two companies offered divestitures of almost $7.5 billion worth of their assets to obtain regulatory clearances, these were not considered adequate by the regulatory authorities. Hence, a law suit has been initiated against the deal.
Halliburton, which had announced the stock and cash deal in November 2014,has always been fully committed to completing the merger. Apart from offering divestitures, the company issued a total of $7.5 billion senior notes of debt in November 2015, to be raised in five tranches spread over the next 30 years, to fund the merger. While it shows the company’s commitment to the deal, this move has significantly increased leverage on Halliburton’s books.
In the table below, we can observe that Halliburton’s debt has almost doubled over the last year, primarily due to the issue of senior notes for the deal. This has skewed the company’s capital structure, which is apparent from the significant jump in its debt-to-equity ratio. Thus, this additional debt is likely to be an added burden on Halliburton’s balance sheet, which may not be viewed positively by investors.
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Further to this, the current commodity downturn has continued to take a toll on Halliburton’s profits. The company reported EBITDA of $3.9 billion in 2015, more than 45% lower compared to 2014. As a result, the company’s ability to service its long-term debt has dropped sharply, which is visible from the steep increase in the company’s debt-to-EBITDA ratio. In addition, the oilfield contractor’s ability to meet its interest obligations from its operating profits has also declined notably.
Thus, we figure that Halliburton’s credit capacity has deteriorated significantly over the last year, as the company prepared to complete its merger with Baker Hughes. Further, we expect this situation to remain weak even in 2016, as the company has large long term debt on its books, while its operational performance is likely to be poor, owing to the ongoing oil slump.
Have more questions about Halliburton (NYSE:HAL)? See the links below:
- How Will The Halliburton-Baker Hughes Deal Failure Impact Halliburton’s Equity Value?
- Did Halliburton Pay A Higher Price For Baker Hughes’ Acquisition?
- Downward Revision of Halliburton’s Price From $42 To $38 Per Share
- How Valuable Are Halliburton’s North American Markets Compared To Its Middle East & Asian Markets?
- How Much Will Halliburton’s Revenue Grow If Oil Prices Rebound To $100 Per Barrel By 2018?
- What Is Halliburton’s Fundamental Value Based On 2016 Expected Numbers?
- How Much Will Halliburton’s Revenue And EBITDA Grow Over The Next Five Years?
- How Has Halliburton’s Revenue And EBITDA Changed Over The Last Five Years?
- What Is Halliburton’s Revenue And EBITDA Breakdown?
- How Has Halliburton’s Revenue And EBITDA Composition Changed Over The Last Five Years?
- Halliburton: The Year 2015 In Review
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Halliburton Company
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