![467094355](https://a673b.bigscoots-temp.com/wp-content/uploads/2014/07/467094355.jpg?w=400)
As Baron Rothschild was reported to have said after the Battle of Waterloo, “The time to buy is when there is blood in the street, even if the blood is your own.” While the streets of the oil business may not yet be running with blood, there are no indications that 2015 could be a year of bleeding in the industry. And the services companies may take a particular beating.
In a research note out Tuesday, Merrill Lynch said:
In our view the acquisition would help fill the artificial lift and chemicals gaps in HAL’s portfolio and add greater scale internationally that would enhance fixed cost absorption. HAL expects nearly $2bn of annual cost synergies, with upside from revenue and tax synergies, which should help narrow the international margin gap to [Schlumberger Ltd. (NYSE: SLB)]. We now estimate the deal to be 3% accretive to 2016 EPS (ex-integration costs and assuming $1bn of cost synergies) with lower cash flow/earnings volatility potentially driving a 15% increase in HAL’s forward P/E.
ALSO READ: The 20 Most Profitable Companies in the World
Halliburton’s stock dropped more than 10% on Monday to close $49.23. At its $55.08 closing price on Friday, the stock’s forward P/E ratio based on a Thomson Reuters earnings per share estimate of $4.77 in fiscal 2015 was around 11.55.
The sharp drop in Halliburton’s share price was very likely due to a belief among investors that the company overpaid, the deal will never pass regulatory scrutiny — or even if the deal makes it past regulators Halliburton will have to divest some assets — or if Halliburton has to pay the $3.5 billion break-up fee that will be a downer for the stock. These same reasons are also dampening enthusiasm for Baker Hughes’ stock.
But Sterne Agee’s analysts think the deal is a win-win:
We believe the combination of HAL and BHI creates a larger, more diverse company that will likely generate higher margins, better free cash flow, strong returns on capital and ultimately receive a higher valuation multiple. We reiterate our Buy on HAL and BHI.
What both of these notes suggest is that in the oil business bigger is always better and there is a lot of truth to that. It is nearly impossible to imagine that Exxon Mobil Corp. (NYSE: XOM) or Chevron Corp. (NYSE: CVX) will disappear in the next few years due to lower crude prices. It is not so hard to imagine that there are any number of smaller producers and services companies that will struggle as capital spending has to be cut back so that they can continue to pay dividends to keep stockholders happy.
As the smaller producers cut back on capex, services companies will be forced to retrench. Larger services companies stand a far better chance of surviving the next few years, and that’s why now is a good time for Halliburton and Baker Hughes to join up.
Did Halliburton make a great deal? Probably not as good a one as it might have made if it could have waited another year, but moving before its own blood was in the streets made good sense.
ALSO READ: The 10 Safest High-Yield Dividends
Halliburton’s shares were trading up about 1.2% Tuesday morning, at $49.79 in a 52-week range of $47.60 to $74.33.
Baker Hughes shares were up about 1.6% to $66.29, still well below the offer price of $78.62 a share as investors ponder the known unknowns in the transaction.
Want to Retire Early? Start Here (Sponsor)
Want retirement to come a few years earlier than you’d planned? Or are you ready to retire now, but want an extra set of eyes on your finances?
Now you can speak with up to 3 financial experts in your area for FREE. By simply clicking here you can begin to match with financial professionals who can help you build your plan to retire early. And the best part? The first conversation with them is free.
Click here to match with up to 3 financial pros who would be excited to help you make financial decisions.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.