Halliburton Is Back In The Acquisition Game

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The rebound in commodity prices over the last few weeks has not only brought optimism to the entire oil and gas industry, but has also caused a sharp rise in the M&A activities of the industry. The latest deal in the oilfield services industry is the merger of Baker Hughes (NYSE:BHI) and General Electric‘s (NYSE:GE) oil and gas operations, which will result in the formation of a leading equipment, technology, and services provider in the sector, with a pro forma revenue of $32 billion. The deal is likely to shake Halliburton‘s (NYSE:HAL) existing position as the second largest oilfield contractor in the world. Apart from this merger, Schlumberger (NYSE:SLB), the world’s largest oilfield contractor and Halliburton’s closest rival, had completed the acquisition of Cameron, an oilfield equipment maker focused at the Subsea market, in April of 2016, and leveraged the synergies from the deal to weather the ongoing commodity slump. Thus, backed by the growing pressure to consolidate its operations, Halliburton returned to the acquisition race, even after a failed attempt at acquiring its immediate competitor, Baker Hughes.

Last month, when the markets closed for the Christmas weekend, Halliburton made a silent yet material announcement regarding a potential acquisition. The company reported that it had filed the papers with the Federal Antimonopoly Service of Russia (FAS) to advance a bid to acquire interest in Novomet Oil Services Holding Limited [1]. The oilfield services provider also highlighted that it was already in talks with various shareholders of Novomet regarding the proposed acquisition, including the possibility of acquiring up to 100% of the company. However, these filings are largely meant to seek clarity from the FAS, and the finalization of the deal will be subject to negotiation of terms, due diligence, regulatory approvals, and other legal conditions.

Although the news was released on a Friday and the subsequent trading day was a public holiday, Halliburton’s stock did not witness much movement on Tuesday, and saw only a marginal decline over the next few days. This implies that the market has a mixed opinion about the move.

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HAL-Q&A-dec-1

Source: Google Finance

On the one hand, the optimists believe that the deal will strengthen Halliburton’s position in the artificial lift market, a growing segment of the oilfield services industry, since Novomet is an international artificial lift company focusing primarily on electrical submersible pumps. At present, the Houston-based company has a weak presence in the market compared to its competitors. Hence, a combination of Novomet’s products and Halliburton’s platform and technology is likely to enable the company to expand its operations to tap into the growth potential of this market.

HAL-Q&A-dec-2

Source: Schlumberger Presentation, Energy & Natural Resources Conference

On the other hand, the pessimists view the move as a bad one for Halliburton, as it comes at a time when the relations between the US and Russia are strained and under severe scrutiny. The fact that the company is based in Perm, Russia, could raise many eyebrows, as the country was recently alleged as influencing the US Presidential elections held in November 2016. While these charges have not been proved, it will be very difficult for Halliburton to convince the government for this deal, given the existing US sanctions against Russia and their disagreement on the war in Syria.

Since the deal value and other details of the proposed acquisition are still unknown, it will be too early to comment whether or not the deal will come through. However, the announcement can be considered as an indication of Halliburton competing with its peers and the rising pressure to expand its operations inorganically.

Have more questions about Halliburton (NYSE:HAL)? See the links below:

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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Notes:
  1. Halliburton Announces Regulatory Filing in Connection with Potential Acquisition, 23rd December 2016, www.halliburton.com []