Halliburton deal may be start of energy takeovers

Halliburton's deal for Baker Hughes 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 US 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 deal 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 could go after National Oilwell Varco, 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, said Royal Bank of Canada.

The drop in crude prices could even make $123 billion BP an acquisition candidate, said Oppenheimer Holdings .

“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.

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 – 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 per cent from their July high, wiping out more than $10 billion of market value. Brent crude is down 28 per cent this year.

“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, which oversees about $31 billion, said.

“Baker Hughes might be thinking tougher times ahead and Halliburton wants to be opportunistic here.”

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 said.

In the exploration and production sector, analysts last month highlighted Laredo Petroleum as an example of a company whose weak balance sheet may force it to find a buyer. Others such as Pioneer Natural Resources and Oasis Petroleum are now offering top acreage in some of the best US shale plays at a relative bargain.

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 US history behind it, said Mr 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.

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 and the well-support unit of John Wood Group to help expand the oil and gas division.

National Oilwell Varco “has number 1 market share in virtually all their areas of emphasis,” Mr Hallead said .

“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.

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.

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, 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 said. "People are going to dig down and look at more of these deals.".

– Bloomberg