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Farallon Capital Adds a New Position in Baker Hughes

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Mar. 23 2015, Updated 2:06 p.m. ET

Farallon Capital and Baker Hughes

Farallon Capital has started a new position in Baker Hughes (BHI). The investment represents 2.72% of the overall hedge fund portfolio. The fund bought 3,555,000 shares worth $199 million, according to its latest 13F filings for 4Q14.

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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:

  • North America
  • Middle East, Asia Pacific
  • Latin America
  • Europe, Africa, Russia Caspian
  • Industrial Services

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

Halliburton to acquire Baker Hughes

In November 2014, Halliburton (HAL), which is one of the world’s largest oilfield service providers, announced that it agreed to acquire Baker Hughes (BHI) for $34.6 billion. The shareholders at BHI will get 1.12 HAL shares plus $19 cash for each BHI share held.

This acquisition deal will ensure cost synergies of $2 billion according to Halliburton’s management. Halliburton also agreed to pay $3.5 billion to Baker Hughes in case the deal is cancelled.

Baker Hughes and Halliburton will hold a shareholder meeting on March 27, 2015, in connection with the pending acquisition.

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Baker Hughes to reduce operating costs, 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 5,000–6,500 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. Schlumberger, Halliburton, National Oilwell Varco (NOV), and Baker Hughes 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

Baker Hughes’s revenues were $6.6 billion, up 6% sequentially. Earnings were driven by strong demand and increased activity in some regions, including the 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.

Revenue was up 10% to $24.6 billion in 2014. 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, Baker Hughes implemented a $600 million share repurchase, 71% higher than 2013. The company declared a quarterly dividend of $0.17 per share.

The next article in this series explores Farallon Capital’s position in CareFusion Corporation.

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