The 5.6% increase in the Houston-based Baker Hughes's stock over the last four weeks, settling near $55 when markets closed on Monday, compares with 67% slide in the Market Vectors Oilfield Services ETF (OIH) , which includes 26 of the leading oilfield services companies. The drop has been fueled by the deteriorating crude prices which touched their five-year lows on Monday.
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But overall, the Baker Hughes's shares are up 3.2% year to date, thanks to the recent upswing which came on the back of Halliburton's decision to acquire Baker Hughes for nearly $35 billion in cash and stock.
The deal would alter the competitive landscape in the oilfield services industry, creating the biggest player in terms of 2014 revenues, a market leader in North America and the second biggest oilfield services company in other parts of the world, after Schlumberger (SLB) . The two companies expect the transaction to close by the second half of next year.
Melanie Kania, Baker Hughes's spokesperson, was not available for comment during press time.
That said, the deal raises antitrust concerns and therefore, it would require approvals from various regulatory bodies from all around the world, including the U.S. Europe, China and Brazil. To alleviate such fears, Halliburton has agreed to sell $7.5 billion of revenue generating assets but in last week's report, Oppenheimer's analyst James Schumm predicted that the divestitures will be likely around $5 billion.
Schumm says that although the deal faces "above average risk" of being blocked by a regulatory agency, there is still a 75% chance of a successful merger. A merger would strengthen Halliburton in the production chemicals market, give the company "much-needed exposure" in the robust artificial lift market and will allow the company to ramp-up competition against its bigger rival Schlumberger internationally.
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To gain exposure to the larger Halliburton of the future, investors should consider Halliburton instead of Baker Hughes. Following the increase in the latter's shares, Baker Hughes has become more expensive than Halliburton, in terms of price to earnings ratio, which is often used to measure a company's valuation.
As per data compiled by Thomson Reuters, Halliburton is currently trading 8.9 times its consensus 2015 earnings estimates, lower than Baker Hughes which is priced 12.2 times.
Further, Schumm says that for Baker Hughes stock, the potential risks associated with the possibility of a failure of the merger outweigh the benefits that could come from an approval. Therefore, investors should "take the money and run." If the deal fails and Baker Hughes's stock tanks, then investors will always have the option of buying the shares again at pre-deal levels.
It is worth mentioning here that Halliburton will have to wait a couple of years before it start seeing the benefits of the merger. According to Oppenheimer's estimates, the antitrust review process could take a year while the process of integration of the two companies could take an additional two years.
During this period, Schlumberger won't be sitting idle. The current market leader will use this as an opportunity to grow its market share.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
TheStreet Ratings team rates BAKER HUGHES INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate BAKER HUGHES INC (BHI) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, growth in earnings per share, increase in net income and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
You can view the full analysis from the report here: BHI Ratings Report