Baker Hughes (BHI) said Monday it would buy back $1.5 billion in shares and pay down $1 billion in debt with the $3.5 billion break-up fee it's getting from Halliburton (HAL - Get Report) after their $35 billion merger deal fell apart due to regulatory opposition.
The Houston oilfield services provider also plans to refinance its $2.5 billion credit facility, which expires in September.
The company said it would improve efficiency by cutting costs over and above the estimated $300 million worth it was forced to keep as part of the merger deal, which it expects will save it $500 million annually by the end of this year. It also plans to build a broader range of global sales channels for some countries and keep and possibly expand part of its U.S. onshore pressure pumping business to improve its return on invested capital.
"The company will approach these actions thoughtfully, decisively and swiftly to position the company for success and to maximize shareholder value," Baker Hughes chairman and CEO Martin Craighead said in a statement. "As we implement these changes, we remain focused on running the business efficiently while capitalizing on our strengths as a product innovator to create new growth opportunities."
Baker Hughes' stock was trading relatively flat before the markets opened Monday, as was Halliburton's.
Craighead said that the company would continue to focus on developing products that lower costs and maximize production for oil and gas operators, including in its well construction business, which is a leader in drilling services, drill bits and completions, and its well production business, which has a "unique" portfolio of artificial lift systems, wireline services and production chemicals.
"More than ever, our customers need to lower their costs and maximize production," he said. "We intend to build on our strong foundation and market position by simplifying the structure of our business and evolving our commercial strategy to deliver significant value to shareholders."
The company said Craighead and CFO Kimberly Ross would talk about further plans on a webcast Tuesday.
Analysts didn't seem too surprised by the deal break, which was announced Sunday, saying Baker Hughes and Halliburton are both good plays on improving conditions in the oil and gas industry. "The fact that regulators couldn't get comfortable with a combined HAL/BHI illustrates that which we already knew: [that] these are two darn good OFS [oilfield services] franchises," Tudor, Pickering, Holt & Co. wrote in a note Monday. "Own both these stocks for forthcoming cyclical recovery."
RBC Capital Markets analyst Kurt Hallead reduced his price target for Baker Hughes to $50 per share versus the $66 merger valuation but rated it outperform because of its opportunity to improve margins and market share on a standalone basis. He said he continues to like Halliburton for its exposure to an eventual North American recovery, dominant market positions and technology-based service offerings and has a price target of $42 for the stock.
Analysts at Seaport Global Securities, who raised their price target for Baker Hughes to $58 from $56, said while the news was disappointing, the uncertain merger's overhang kept many investors from buying both companies' shares. "We think investors should buy shares of both companies, given our view that a multi-year recovery in North American upstream spending will follow the current downturn, likely starting in late 2016 or early 2017," they said.
SGS expects continued speculation that General Electric (GE - Get Report) or another industrial buyer may make a bid to buy Baker Hughes, although they think that it has a low probability of happening. The analysts do think the breakup may redirect attention to FMC Technologies (FTI - Get Report) as an acquisition target and raised their price target for that stock to $34 from $33.
Halliburton announced the transaction in November 2014, saying it would sell at most $7.5 billion in assets to gain regulatory approval. But last month the Department of Justice filed a civil antitrust lawsuit in the U.S. District Court in Delaware seeking to the block the purchase, claiming that it threatened to eliminate competition, raise prices and reduce innovation in the oilfield services sector.