Big Oil Deals Return as Halliburton Moves First

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Halliburton Co.
Halliburton Baroid storage silos, operated by Halliburton Co., stand at Aberdeen Harbour in Aberdeen, U.K. Halliburton approached Baker Hughes about a deal several weeks ago, a time when the target was trading near its cheapest price in more than a year Photographer: Simon Dawson/Bloomberg

Halliburton Co.’s deal for Baker Hughes Inc. may be just the start of big energy takeovers as oil prices slump.

Crude has plunged to a more than four-year low amid a U.S. supply glut. That’s making top energy companies, from equipment makers to oil explorers, cheaper for buyers that have the capital to survive and the confidence to strike. Halliburton, a $47 billion provider of oilfield services and equipment, approached Baker Hughes about a combination several weeks ago, a time when the target was trading near its cheapest price in more than a year. The forces that drove them together will likely spur on other dealmaking as well.

General Electric Co. could go after National Oilwell Varco Inc., a $31 billion energy equipment company, to show it’s serious about being big in the industry after last year’s purchase of pumpmaker Lufkin Industries Inc., said Royal Bank of Canada. The drop in crude prices could even make $123 billion BP Plc an acquisition candidate, said Oppenheimer Holdings Inc.

“Low oil prices always triggered industry consolidation,” said Fadel Gheit, an analyst at Oppenheimer. It’s “survival of the fittest. Larger companies view this correction as a window of opportunity to make acquisitions that would improve their own operation and generate synergy benefits.”

Representatives for Fairfield, Connecticut-based GE and London-based BP declined to comment. A representative for Houston-based National Oilwell Varco didn’t respond to a request for comment.

Two Views

Halliburton’s planned $34.6 billion takeover of Baker Hughes for cash and stock represents the biggest oil-services deal on record. By buying the maker of drill bits and pressure-pumping tools, Halliburton -- the second-biggest oilfield-services company after Schlumberger Ltd. -- will gain more market clout to help insulate itself from a sustained oil market downturn.

Before news of the talks between the two companies became public, Baker Hughes shares had slipped 32 percent from their July high, wiping out more than $10 billion of market value. Brent crude, down 28 percent this year through last week, extended its decline today.

“Just given the backdrop of the dramatic drop in oil prices, you’ve got probably two different views on whether this is going to be sustained at lower levels or whether there will be a recovery,” Eric Mintz, a fund manager at Eagle Asset Management Inc., which oversees about $31 billion, said by phone. “Baker Hughes might be thinking tougher times ahead and Halliburton wants to be opportunistic here.”

Today, Baker Hughes shares rose 8.9 percent to $65.23. Halliburton declined 11 percent to $49.23.

Acquisition Opportunities

That dynamic is setting up acquisition opportunities throughout the energy industry. Buyers with cash to spend aren’t going to let the cheapest valuations in years pass them by and targets threatened by lower prices may become more willing sellers.

“The bigger companies can sharpen their pencils,” Chad Mabry, a Houston-based analyst at MLV & Co., said by phone.

In the exploration and production sector, analysts last month highlighted Laredo Petroleum Inc. as an example of a company whose weak balance sheet may force it to find a buyer. Others such as Pioneer Natural Resources Co. and Oasis Petroleum Inc. have top acreage in some of the best U.S. shale plays and are now trading at a relative bargain. Pioneer is seeking a buyer for its Eagle Ford Midstream venture with India’s Reliance Industries Ltd.

Even some of the largest companies could become vulnerable. There’s much less financial uncertainty surrounding BP now that it’s largely put the biggest offshore oil spill in U.S. history behind it, said Gheit of Oppenheimer. That, combined with lower oil prices, could make the company a takeover target for one of its peers, the analyst wrote in a report this month.

Good Logic

On the oilfield-equipment side, there’s some “good industrial logic” for GE to buy National Oilwell Varco, said Kurt Hallead, an analyst at RBC in Austin, Texas. GE has bought companies including Lufkin, Dresser Inc. and the well-support unit of John Wood Group Plc to help expand the oil and gas division.

National Oilwell Varco “has No. 1 market share in virtually all their areas of emphasis,” Hallead said in a phone interview. “If GE wanted to get bigger and wanted to expand their manufacturing footprint and exposure to different end markets within the energy space,” buying the oilfield-equipment maker is one way to do it.

Regulatory Roadblocks

Halliburton will likely face antitrust scrutiny in its deal for Baker Hughes. The company said while it has agreed to sell businesses that generate as much as $7.5 billion in sales, it expects the amount required by regulators to be significantly less.

“My gut is that this is going to have a high degree of scrutiny amongst the regulators, and I would not be surprised if it goes through to see some level of divestitures,” Edward Muztafago, a New York-based analyst at Societe Generale, said in a phone interview.

Regulatory approval of such a transformational deal might inspire buyers to take a closer look at opportunities in more concentrated markets, such as subsea drilling equipment, said Mintz of Eagle Asset. Deals that may have seemed unlikely to pass muster before may become more doable, such as a takeover of FMC Technologies Inc., he said.

A representative for Houston-based FMC Technologies didn’t respond to a request for comment. The company was valued at $13 billion last week.

“Any time there’s a deal, from an investor perspective, it’s going to perk up interest,” Stephen Gengaro, a New York-based analyst at Sterne Agee Group Inc., said in a phone interview. “People are going to dig down and look at more of these deals.”

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