Explaining Baker Hughes’s strategy
On April 30, Halliburton (HAL) and Baker Hughes (BHI), the second and third largest oilfield service companies by market capitalization, terminated their proposed merger agreement. According to the terms of the transaction, BHI will receive a $3.5 billion termination fee from HAL following the termination. Read more about the proposed merger in Market Realists’ Baker Hughes-Halliburton: A critical deal for the oil industry.
Following the break-up, BHI disclosed its strategies on May 2, focusing on the following points.
improving efficiency by reducing costs: expected to result in $500 million in savings by the end of 2016
rationalization of its full-service model: BHI may reduce the scope of its onshore pressure pumping business in the United States
increasing the range of its global sales channels for select countries
optimization of its capital structure
What are BHI’s plans for its termination fee from Halliburton?
In order to optimize its capital structure, Baker Hughes plans to repurchase shares totaling $1.5 billion and debt totaling $1 billion. BHI also plans to refinance its $2.5 billion credit facility, which expires in September 2016. The company will finance these programs through the merger termination fee it will receive from Halliburton. This move should improve BHI’s balance sheet strength. Its long-term debt, which was $3.9 billion as of March 31, could fall 26% after this step. Along with debt refinancing, this change could lower BHI’s interest costs. Baker Hughes is 0.11% of the SPDR S&P 500 ETF (SPY).
Baker Hughes thinks the oilfield service industry will remain challenging due to overcapacity, commoditized pricing, and low barriers to entry. BHI’s management plans to thrive in this environment through cost reductions and increased operational efficiencies. BHI reduced its headcount by 2,000 in fiscal 1Q16. In fiscal 2015, it reduced its workforce by 18,000. Also, BHI can now do away with its merger-related costs, which amounted to $102 million in 1Q16. This move could improve its earnings going forward. To learn more about Baker Hughes’s earnings, check out Market Realists’ Why Did Baker Hughes’s 1Q16 Earnings Miss Estimates?
Following the termination of the proposed merger with Halliburton, how do Wall Street analysts rate BHI’s stock? Read the next part of this series to find out.