So, the planned Halliburton (HAL)/Baker Hughes (BHI) merger has officially come apart, more than a year after its announcement. This is hardly a surprise, as the markets had already valued oil services stocks in the past month knowing that the deal was toast, but there are still some interesting points to be made about the sector, and if one of these two is a value to be bought.
Halliburton's $28 billion dollar deal with Baker Hughes was designed to provide protection in a collapsing oil services industry -- one where oil prices were and still are destined to stay low for some time. Together, the No. 2 and No. 3 oil services companies were poised to challenge No. 1 Schlumberger (SLB) in what was shaping up as a much more difficult and challenging environment in drilling services. (Schlumberger is a holding in the Action Alerts PLUS portfolio.)
I thought the deal was a "no-brainer" when it was originally announced in November 2014, with several overlapping areas of services and at least a two years of hard times ahead. It was an example of the consolidation inside the oil patch that I thought was inevitable and necessary during the bust in oil prices.
But regulatory hurdles accumulated. As the pressure from the Justice Department on Halliburton began to mount, I couldn't understand what the Obama administration was fearing. Competitive costs had cratered all the oil service names -- making mergers a survival tactic, not a plan to destroy competition.
As we moved through 2016, with an April 30 deadline looming, it was increasingly clear the merger was dead. But the stock charts tell the market's view of the dying deal:
The rise in oil prices from lows in February floated both stocks upward, but as the deal's do-or-die date approached, it was clear that the market much preferred Halliburton to Baker Hughes as separate entities, despite the $3.5 billion breakup fee that Halliburton would be forced to pay if the merger fell through.
Halliburton does have better profitability numbers than Baker, but Baker still maintains a slim lead in U.S. onshore capability, one that I believe will be worth owning in a year -- if not already at these prices.
One more chart to consider is that of Helmerich & Payne (HP), the king of U.S. fracking services.
What's interesting is how strongly Helmerich & Payne stock surged as it became clear that the Halliburton/Baker deal was dying. The market believes that in an independent world of competition for U.S. onshore fracking services Helmerich wins, while with Halliburton and Baker combined, it would lose.
These charts point to a market that has little respect for Baker Hughes as a standalone concern. But in the current oil services sector, it now becomes the value choice, by far. CEO Martin Craighead has said he'll use the breakup fee to buy back shares, retire debt and look to concentrate precisely in that soon-to-be-juicy onshore domestic fracking sub-segment. And you never know if Action Alerts PLUS holding General Electric (GE) will want to jump in on Baker, now that it's freed up from the merger.
Baker Hughes was always one of my favorite trading vehicles -- and I've made tons of money in the past buying BHI in the $42 range. If the market gives me the chance, I'm going to do it again. The shares are sharply undervalued compared to peers.