Time to Bet on Halliburton by Buying Shares in Baker Hughes

Halliburton equipment is stored at an equipment yard in Alvarado, Texas. ENLARGE
Halliburton equipment is stored at an equipment yard in Alvarado, Texas. Photo: cooper neill/Reuters

It seemed like a good idea at the time.

The bottom was dropping out of the energy market and oil-field-services giant Halliburton Co. HAL -3.69 % decided to turn adversity into opportunity. Last November, it pounced on competitor Baker Hughes Inc. BHI -4.20 % to form a proposed entity that would rival industry top dog Schlumberger Ltd. SLB -2.17 % in size and scope.

The deal would be complicated and risky but worth it because it was a twofer: It would yield significant cost savings and probably a stock-market rating more in line with Schlumberger’s historical premium over peers.

That was then and this is now. Analysts’ expectations for Halliburton’s full-year 2015 earnings per share already had dropped from $ 5.35 that August to $ 4.82 at the time of the deal as petroleum prices cratered, according to FactSet. Now analysts expect only $ 1.49.

The gloom deepened last Thursday when Schlumberger’s management said on its earnings call that the industry’s woes “were shaping up to be the most severe downturn in the industry for decades.”

Photo: The Wall Street Journal

Halliburton’s stock fell in response. Its own results on Monday should look bleak, too: Analysts expect it to report third-quarter earnings per share of 28 cents versus $ 1.41 a year earlier.

But cheer up—there is still a chance to make lemonade out of lemons, and not just because Halliburton’s stock is a third lower since unveiling the deal and probably good value.

An even bigger bargain is its target. Antitrust concerns may yet derail the deal or require even more extensive divestitures. If it goes through, though, the combined value of Halliburton stock and cash on offer is worth nearly $ 61 a share for Baker Hughes. The stock closed Friday at $ 53.83. If a deal closes by Dec. 15 as planned, then that premium is good for an 85% annualized profit.

That reflects risks, of course, but those are mostly Halliburton’s. It will have to pay $ 3.5 billion to Baker Hughes if antitrust concerns derail the tie-up, some 15% of that company’s now depressed market value. Timing is everything and, nearly a year after its big gamble, it is finally time to be bullish on Halliburton—by owning Baker Hughes.

Write to Spencer Jakab at [email protected]

WSJ.com: Markets

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