By Dana Mattioli, Liz Hoffman and Dana Cimilluca
Halliburton Co. is in talks to buy Baker Hughes Inc., a deal
that would help guard the big oil-field services companies against
falling oil prices.
The talks are moving quickly and a deal could be forged soon,
people familiar with the matter said. There is no guarantee the
companies will reach an agreement, however, or that regulators
would approve one if they did.
A purchase of Baker Hughes would likely be at a premium to the
company's market value, which stood at just under $22 billion
before The Wall Street Journal reported the talks Thursday
afternoon. Baker Hughes shares were up around 25%, including
after-hours trading, following the report. That gave the company a
market value of about $26 billion. Halliburton's market value is
about $48 billion.
Baker Hughes subsequently said it has "engaged in preliminary
discussions with Halliburton."
Halliburton and Baker Hughes are the second- and third-largest
oil-field services companies in the world by revenue, respectively,
behind Schlumberger Ltd.
Such companies help energy producers, from Texas wildcatters to
national oil companies, find and extract oil-and-gas deposits by
selling equipment, renting tools, supplying labor and building
worker camps in far-flung drilling fields. Oil-field services
companies provide the drill bits that can be steered miles
underground with precision, as well as fleets of trucks that pump
fluids for hydraulic fracturing of shale rock--methods that have
powered the U.S. drilling boom.
But the recent drop in oil prices threatens the services
companies' business as it could make oil-and-gas production less
profitable and spur clients to cut back on operations or demand
better prices from their suppliers. Oil prices in recent months
have dropped from over $100 a barrel to less than $80 amid global
economic weakness and the surging U.S. supply.
Merging Halliburton and Baker Hughes, which have substantial
overlap in operations, would lead to substantial cost savings
helping the pair weather any further declines in oil prices.
Oil-field services companies' shares rise and fall largely with the
price of oil, and Halliburton's and Baker Hughes's stocks have
dropped sharply since the beginning of summer. Shares of Baker
Hughes closed 15% higher on Thursday, while Halliburton's shares
rose 1%.
The exact motivations of the talks were unclear.
The Houston-based companies would have to win approval for any
tie-up from global regulators--not a foregone conclusion, given the
companies' market positions and because several countries where
they operate have become more assertive in reviewing proposed deals
in recent years.
A combined Halliburton and Baker Hughes would dominate several
products in the global oil-field services market. Together, they
control about half of the market for cementing, according to
petroleum-services research firm Spears & Associates Inc. The
process involves encasing wells in layers of cement to prevent
leaks, such as the one at the Deepwater Horizon rig that exploded
in the Gulf of Mexico in 2010. Improper cementing has been cited
for groundwater pollution around U.S. shale wells.
"Literally, every product or service one of these companies
offers, the other one offers," said Richard Spears, the research
firm's vice president.
The U.S. market for fracking and other services might be
sufficiently fragmented to ease antitrust concerns, he said.
Halliburton and Baker Hughes have just 25% of the U.S. onshore
fracking market, for example, and "would have no real pricing
control," Mr. Spears said.
But the pair still would have to contend with scores of other
global regulators. The companies operate in more than 80
countries--nearly everywhere that oil-and-gas drilling takes
place.
Bill Herbert, an analyst with Houston investment bank Simmons
& Co. International, said the deal would be "tenable" from an
antitrust standpoint, though it would require Halliburton to sell a
significant number assets across a range of business lines. "The
industry needs consolidation," in part because of lower oil prices,
he said.
Combined, Halliburton and Baker Hughes would still be
significantly smaller than Schlumberger, which has a market value
of about $125 billion.
Halliburton and Baker Hughes vie for slices of the huge sums
energy producers spend on exploration and production--$682 billion
this year alone, according to a Cowen & Co. estimate.
Baker Hughes was created in 1987 when Baker International merged
with Hughes Tool, which was founded by the father of billionaire
aviator, inventor and Hollywood tycoon Howard Hughes Jr. The
company has about 61,000 employees and posted third-quarter sales
of $6.25 billion, about half of which came from North America.
Halliburton was founded in 1919 and has more than 80,000
employees. The company got its start when founder Erle P.
Halliburton borrowed a wagon, a team of mules and a pump, and
started an oil-well cementing business.
The company, where Dick Cheney served as chief executive before
he was vice president, has been looking at Baker Hughes for years,
one of the people said. Halliburton's approach was unsolicited, the
person said.
Halliburton in recent years has contended with fallout from its
role in the Deepwater Horizon explosion and subsequent oil spill.
Halliburton was a contractor on the rig for BP PLC and agreed in
September to pay $1.1 billion to Gulf Coast residents, businesses
and local governments.
A combination of the two companies would be one of the largest
energy mergers in recent years. There have been just 11 energy
deals above $20 billion globally since 1995, according to
Dealogic.
The marriage also would come as the mergers-and-acquisitions
market has been robust. Global M&A volume has reached $2.9
trillion so far this year, up 28% from the same period last year,
according to Dealogic.
Ryan Dezember and Alison Sider contributed to this article.
Write to Dana Mattioli at dana.mattioli@wsj.com, Liz Hoffman at
liz.hoffman@wsj.com and Dana Cimilluca at
dana.cimilluca@wsj.com
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