why is haliburton buying baker-hughes?
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Haliburton BlooBook by Hannah AngTRANSCRIPT
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Why is Halliburton BuyingWhy is Halliburton BuyingBaker-Hughes?Baker-Hughes?
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RoadmapRoadmapIndustry Overview Company Considerations HAL + BHI Trade Idea Appendix
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INDUSTRYINDUSTRYOVERVIEWOVERVIEW
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Key Macroeconomic Trend:Key Macroeconomic Trend:Persistent Oil Price DepressionPersistent Oil Price Depression
Falling trend in oil prices
52% decrease over 6 months (from $106/bbl to $50/bbl)
Robust supply growth & weak global demand
US EIA forecast: continuation of pricing pressures, especially in 1H2015
WTI Crude Oil Prices ($/bbl)World Oil Demand & Supply Growth Rates
Source: US Energy Information Administration
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Competitive LandscapeCompetitive Landscape
*2013
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COMPANYCOMPANYCONSIDERATIONSCONSIDERATIONS
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World's #2 oilfield services (OFS) firm
Delivers upstream-related products & services tooil and gas producers
ExplorationDevelopmentProduction
What is Halliburton?What is Halliburton?
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Business ModelBusiness ModelRevenue by Operating Segment
D&E Revenue by Product Line C&P Revenue by Product Line
Completion & ProductionPressure pumping (~45% of HAL totalrevenue; ~20% CAGR for demand)Artificial lift (~5%)
Drilling & EvaluationGreater revenue stream diversification
D&E
C&P
40%
60%
Sources: Barclays research, company financials
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Geographic OperationsGeographic OperationsHigh concentration in North America (~52% of total revenue)Well-diversified across international regionsNo country comprising above 10% of revenues, besides US Historical diversification: incremental increases from 2011
Incremental increases of int'l revenue ratio expected to continueInt'l revenues forecasted to exceed 50% of total from 2014
52%13%
18%
17%
Revenue by Geographic Region International Revenue
Sources: Barclays research, company financials
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Headline Operating MetricsHeadline Operating MetricsEBIT & Margin
Revenue Growth by Geography Revenue Growth by Operating Segment
Decreasing rate of revenue growthIncreasing diversification of revenuestream by region & operating segmentSteadily declining EBIT & margins EBIT margins: from 19% to 11% over 3 yrsRising costs (guar gum), pricing pressuresin US, & non-recurring charges (Macondo)
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Gearing MetricsGearing MetricsIncreasing leverage from 2011
2012 to 2013: 150%+ jump in net debt /EBITDA due to large debt growth
Still healthy relative to peers
SLB, BHI, WFT @ 0.89x, 0.82x, 4.31x resp.
Net Debt / EBITDA (x)
Net Debt ($m) Debt / Equity (%)
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Financial Forecasts ('14E-'18E)Financial Forecasts ('14E-'18E)
EBIT & MarginsSales & Growth
Sales growth: negative in 2014, sluggish improvement onwards
EBIT margins: continued decline from 2014
Persisting high costs & pricing pressures in NA
Macondo charge ($1b pre-tax in 2014)
Oil price impact to be felt in 2015
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Peer Relative Share PricePeer Relative Share PricePerformance (Last 7 Months)Performance (Last 7 Months)
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HAL + BHIHAL + BHI
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HAL + BHIHAL + BHI
The GOALIncrease growth, margins, and returnsExpand product portfolio & geographical reach Diversify risk across geographies & product segments
Narrow the gap between HAL (#2) and SLB (#1)
The WHY
Overcome falling oil prices & increased regulationsOvercome [firm-specific challenges]
The HOW
Potential COST synergies (~$2b p.a. post integration)Potential REVENUE synergies
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Potential $2b p.a. Cost SynergiesPotential $2b p.a. Cost Synergies
Improve local & international operational efficiencies (50%+ of cost synergies)
Eliminate overlap in key, high-cost product areas
Streamline administrative/organizational structure
Optimize R&D
Source: Halliburton investor presentation
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Potential Revenue SynergiesPotential Revenue SynergiesExpansion of Product Portfolio
Expedited Extension of Geographic PresenceFaster, more cost effective market penetrationvs. organic "product-line-by-product-line" approachHighlight: resource-rich Canada and Russia, smaller int'l markets
Source: Jefferies and Oppenheimer research
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Challenges Challenges
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Worldwide Regulatory IssuesWorldwide Regulatory Issues
Antitrust regulations in the US, Europe, Asia
HAL + BHI = ~500 increase in HHI = virtual duopoly
Currently awaiting approvals
Potential voluntary divestment of up to $7.5b
Break-up fee of $3.5b
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Cultural Integration ProblemsCultural Integration Problems
BHI: declared open bid right before announcement
HAL: threatened hostile takeover & total board replacement
Price increase of $38b from $35b
Possible lingering animosity, which will affect operations
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Other ChallengesOther ChallengesHAL-SLB Gap Still Large
HAL + BHIPotential enhanced competitiveness in NA & Russia
SLBSuperior capacity to increase drilling in GOM Secure dominance in China due to unique partnership
Growth Not Guaranteed
Oil prices still falling: threat to synergistic goals Heightened exposure due to merger However, overall plan to overcome headwinds is double-barreled
Capex reduction & internal efficiency measures
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Transaction Summary & AnalysisTransaction Summary & Analysis
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Merger RemediesMerger Remedies
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Financial EffectsFinancial Effects
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TRADE IDEATRADE IDEA
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Discounted Cash Flow AnalysisDiscounted Cash Flow Analysis
WACC = 8.0%
02/05/2015 Closing Price @ $43.36 VS. DCF Valuation @ $36.25
HAL overvaluation by 20%
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