Will Weatherford's Debacle Destroy The Halliburton - Baker Hughes Merger?

The merger between Halliburton HAL and Baker Hughes BHI once seemed like a forgone conclusion. Halliburton would divest certain assets to appease the DOJ and arbitrageurs would gain a windfall from the "Buy BHI, Short HAL" trade. Heading into its second year, the deal is beginning to look more uncertain. After the DOJ ruled Halliburton's divestiture package was insufficient, the oil services giants extended their deadline to April in order to consummate the merger.

The Situation

Halliburton is practically groveling to get approval for the merger, offering to divest assets beyond what was initially required. However, regulators have not been convinced the deal would not hurt competition. Brazil's anti-trust regulator is concerned about higher prices for oilfield services post-transaction. Meanwhile, Jefferies believes the EU is concerned the deal could facilitate coordinated behavior. My previous article explained why Halliburton's divested assets may not be enough to assuage regulators:

If Halliburton has to sell divested assets piecemeal, it may not be able to convince regulators that the buyers (GE or others) of those assets will be large enough to prevent "coordinated behavior" or a dislocation in the oilfield services market.

If the asset divestitures are not enough to convince regulators that the demand/supply dynamics of the marketplace will not be disrupted, a strong number three firm must emerge.

Weatherford's Financial Debacle Could Kill The Merger

Schlumberger SLB, Halliburton and Baker Hughes are considered the top three oil services firms. Weatherford International WFT is ranked number four, particularly for firms with high exposure to land drillers. Post-deal it may be logical to assume that Weatherford could be strong enough to maintain a competitive landscape. However, in my opinion, Weatherford may not survive much longer amid a free fall in oil prices and $7.7 billion of debt.

In Q3 Weatherford experienced a 6% sequential decline in revenue and incurred a $98 million pretax loss. Its North America operations (37% of revenue) are particularly concerning. Loss from operations were $54 million; this followed a $92 million loss in Q2. The competition is so cut throat that in Q3 Weatherford had to scale back two product lines -- rentals and pressure pumping -- due to "punitive economics."

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I am short WFT, NOV and OIS


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Gary Anderson 5 years ago Contributor's comment

I would hate to see a great company, Baker Hughes, swallowed up by a company once run by Richard Cheney. I hope the merger fails. I know business is business, but...

Shock Exchange 5 years ago Author's comment

The Halliburton-Baker Hughes saga is interesting. It's hard to predict whether the merger will be approved or not. SE