BHI and HAL: A Synergistic Acquisition

12/15/2015 12:01 pm EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

Given recent market weakness and his bullish long-term outlook on the North American energy service market, Michael Berger, of Technical420.com, thinks the completion of this acquisition will serve as a catalyst to both companies as the combined company becomes one of, if not the largest provider of products and services to the energy industry in the world.

With crude oil prices continuing to trade at new multi-year lows, investors are frantically searching for investment opportunities that possess downside protection and upside potential. Recent market weakness and our bullish long-term outlook on the North American energy service market have made us increasingly favorable on Halliburton (HAL) and Baker Hughes, Inc. (BHI).

In November 2014, HAL agreed to acquire BHI for $34.6 billion. HAL is paying a more than 40% premium to BHI shareholders and the company is offering a lot of stock to get the deal done. If the deal closes, each BHI shareholder will receive 1.12 shares of HAL and $19 in cash per share. Should the deal not close, HAL must pay BHI $3.5 billion or $8 per share, giving BHI shareholders some additional protection.

During the last month, HAL and BHI have fallen by 5.0% and 5.2% respectively and both companies are trading below their respective 20-, 50-, and 200-day moving averages. We see value in both companies due to our bullish outlook on North America’s energy service industry and the synergies related to the pending acquisition, which we expect to close during the first quarter of 2016.

Synergies, Synergies, Synergies

The combination of HAL and BHI makes the combined company levered to the pressure pumping industry, which we expect to lead the United States oilfield recovery. The merger will provide ample cost reduction efficiencies as BHI’s operations become integrated into HAL’s supply chain. The merger will improve the company’s offerings as it combines BHI’s drilling portfolio with HAL’s completions business.

During the recent downturn, HAL has significantly increased its market share, especially in the pressure pumping industry. HAL already holds a market leading position and the company continues to upgrade its fleet. HAL and BHI are poised to benefit from a 2017 rig count recovery and we expect the combined companies to see revenue from North American operations increase by 75% on a year-over-year basis.

Outlook

The completion of the BHI acquisition will serve as a catalyst to both HAL and BHI as the combined company becomes one of, if not the largest provider of products and services to the energy industry in the world. Recent price weakness has created an opportunity for investors and we would keep both companies on our radar screen.

Michael Berger, Founder and President, Technical420.com

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