Halliburton-Baker Hughes Merger Gets Thumbs Up: What Wall Street's Saying

NEW YORK (TheStreet) - Halliburton's (HAL) $34.6 billion price tag and hefty premium attached to its potential acquisition for smaller oilfield services company Baker Hughes (BHI) may have had investors squirming on Monday, but analysts are fans of the deal.

The deal was driven less by the current low oil prices and more by current conditions in the industry, Halliburton CEO Dave Lesar told CNBC on Tuesday. "As you look at expansion of the unconventionals in the U.S., the growth in the deep water in other parts of world, the national oil companies demanding more from the service companies, I just thought a bigger, stronger integrated company was what was needed to compete in this marketplace," Lesar said on Squawk on the Street.

Rumors of a deal between the two companies heated up last week, with Baker Hughes confirming late Thursday that it was talking to Halliburton. Details of the transaction were officially announced on Monday.

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Halliburton shares were trading down 0.43% to $49.02 on Tuesday on volume that was double its average three-month trading volume of 13 million shares. Shares of Baker Hughes traded down 0.67% to $64.79 on volume of about 16 million shares - also more than double its average three-month trading volume. Here's what analysts, who cover Halliburton, said about the deal.

Ole Slorer, Morgan Stanley (Overweight, $60 PT)

"BHI proposed acquisition would be dilutive to HAL in 2016 and accretive from 2017, in our view. We also expect SLB and WFT gain share near term, but nevertheless expect HAL to narrow its valuation discount to SLB on (1) improved ability to handle more complex international tenders and (2) scope to improve BHI's underperforming NAm margins.

The proposed 43% premium above the HAL/BHI ratio for the previous 3-month period represents a steep premium that gives most of the near-term targeted cost synergies to the BHI shareholders, in our view. While HAL may end up divesting less than the $7.5bn in sales highlighted, we believe the proposed transaction would result in long-term value creation regardless as it would have profound industry and efficiency implications."

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Stephen D. Gengaro, Sterne Agee (Buy, $69 PT)

"We believe the combination of HAL and BHI creates a larger, more diverse company that will likely generate higher margins, better free cash flow, strong returns on capital and ultimately receive a higher valuation multiple. We reiterate our Buy on HAL and BHI.

Based on our current 2014 earnings models, we expect Halliburton revenues and operating income to total $33.1 billion and $5.5 billion, respectively, while Baker Hughes should reach $23.2 billion and $3.1 billion, respectively. Combined revenue for Halliburton and Baker Hughes would be a little over $56 billion (excluding possible divestitures) which would exceed Schlumberger's (SLB) $48.5 billion."

Mike Urban, Deutsche Bank (Buy, $69 PT)

"After reaching an apparent impasse late last week, BHI and HAL announced an agreement to merge, potentially combining the #2 and #3 players to create an industry giant. After reacting favorably on Friday when news of the negotiations was disclosed, HAL's stock sold off sharply today as pricing, structure and terms/ conditions favored BHI to a much greater extent than anticipated. Although the challenges in completing and integrating the deal will be significant, we believe it is a risk worth taking as the new HAL could dramatically alter the balance of power in the industry and should create long-term value for shareholders. We therefore reiterate our BUY rating."

Douglas Becker, Bank of America Merrill Lynch (Buy, $72 PT)

"Halliburton (HAL) and Baker Hughes (BHI) announced a definitive acquisition agreement for $38bn. The combination would surpass Schlumberger (SLB) as the largest oil services company in terms of revenues, even assuming significant divestitures. In our view the acquisition would help fill the artificial lift and chemicals gaps in HAL's portfolio and add greater scale internationally that would enhance fixed cost absorption. HAL expects nearly $2bn of annual cost synergies, with upside from revenue and tax synergies, which should help narrow the international margin gap to SLB. We now estimate the deal to be 3% accretive to 2016 EPS (ex-integration costs and assuming $1bn of cost synergies) with lower cash flow/earnings volatility potentially driving a 15% increase in HAL's forward P/E. In the short term, we expect SLB to be a relative beneficiary given temporary dislocation at the combined company, but expect the pro forma HAL to be an even more formidable competitor in the long run."

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TheStreet Ratings team rates HALLIBURTON CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate HALLIBURTON CO (HAL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income, impressive record of earnings per share growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • HAL's revenue growth has slightly outpaced the industry average of 15.4%. Since the same quarter one year prior, revenues rose by 16.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Energy Equipment & Services industry. The net income increased by 70.4% when compared to the same quarter one year prior, rising from $706.00 million to $1,203.00 million.
  • HALLIBURTON CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, HALLIBURTON CO reported lower earnings of $2.37 versus $2.77 in the prior year. This year, the market expects an improvement in earnings ($4.03 versus $2.37).
  • Despite currently having a low debt-to-equity ratio of 0.50, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Despite the fact that HAL's debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.65 is high and demonstrates strong liquidity.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Energy Equipment & Services industry and the overall market on the basis of return on equity, HALLIBURTON CO has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.

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-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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