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Baker Hughes Is a New Position for ValueAct Capital

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ValueAct Capital and Baker Hughes

During 4Q14, ValueAct Capital started a new position in Baker Hughes (BHI). The fund holds 14,997,500 shares of BHI, which account for 5.27% of the fund’s total 4Q14 portfolio. ValueAct Capital’s investment in Baker Hughes came after Halliburton (HAL) announced it would acquire Baker Hughes. The fund has a stake in both BHI and HAL.

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About Baker Hughes

Baker Hughes is a leading supplier of oilfield services, products, technology, and systems to the worldwide oil and natural gas industry. The company also provides industrial products and services to the downstream chemicals and midstream energy companies. The company operates in more than 80 countries. The company’s five segments include:

  1. North America
  2. Middle East/Asia Pacific
  3. Latin America
  4. Europe/Africa/Russia Caspian
  5. Industrial Services

In 2014, North America contributed almost 50% to the company’s total revenue.

Halliburton to acquire Baker Hughes

In November 2014, Halliburton (HAL), one of the largest oilfield service providers, agreed to acquire Baker Hughes for $34.6 billion. BHI shareholders will get 1.12 HAL shares plus $19 in cash for each share of BHI.

Post completion, the deal will lead to cost synergies of $2 billion per year. If the deal gets canceled, HAL has agreed to pay $3.5 billion to Baker Hughes.

BHI and HAL held a shareholder meeting on March 27 in connection with the pending acquisition.

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Baker Hughes to cut jobs

To deal with the current oil downturn, Baker Hughes and its peers are trying to reduce operating costs. In its 4Q14 earnings release, Baker Hughes announced it will cut 7,000 jobs. This job cut represents 11% of its current global workforce of 62,000. The job cut is expected to take place in 1Q15.

Recently, Halliburton also announced 5,000 to 6,500 job cuts. Schlumberger (SLB) also announced plans to cut 9,000 jobs, or 8% of its total workforce, due to the slowdown in drilling activity. SLB, HAL, National Oilwell Varco (NOV), and BHI are components of the VanEck Vectors Oil Services ETF (OIH). These companies account for 45.53% of OIH.

Strong revenue, earnings, and free cash flow for 4Q14

BHI’s revenues were $6.6 billion, up 6% sequentially. Earnings were driven by strong demand and increased activity in some regions, including Canada, West Texas, North Arabian Gulf, North Asia, and Australasia geomarkets.

Generally accepted accounting principles (or GAAP) net income was $663 million or $1.52 per diluted share, up 77%. Baker Hughes’s increased profitability was due to improved pricing and utilization in its US pressure pumping business. The increased contribution from the Gulf of Mexico and Canadian geomarkets also boosted the company’s profitability. During 4Q14, free cash flow was $838 million.

For full-year 2014, revenue was up 10% to $24.6 billion. GAAP net income was $1.7 billion or $3.92 per diluted share, up 57%. For the full year, free cash flow was $1.6 billion. During the year, the company reduced its capital expenditure by 14% to $1.8 billion.

Returns to shareholders

In 2014, BHI repurchased shares of $600 million, 71% higher than 2013. The company declared a quarterly dividend of $0.17 per share.

To find out more about Baker Hughes, read Market Realist’s, Assessing ValueAct Capital’s activist position in Baker Hughes. In the next part of the series, we’ll discuss ValueAct’s position change in Halliburton.

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