To paraphrase Dickens, it is the best of times, it is the worst of times in the oil patch. Two major mergers in the last six months appear to be headed down very different roads. The ill-fated Baker Hughes/Haliburton merger has now collapsed, whereas the FMC Technologies/Technip merger has just won early approval from U.S. regulatory authorities. These outcomes spell very different paths ahead for the companies involved.
It’s been a couple of months now since the much heralded merger of Baker Hughes and Haliburton hit a wall of reality from the Justice Department. The merger arbitrage premium on BHI had been so high for a long time that it was clear the markets were very skeptical about antitrust authorities letting the merger go forward in the first place. Once all parties involved accepted reality though, it did become clear that both Baker Hughes and Haliburton will be fine in the medium-term.
The path forward for Baker Hughes and Haliburton rests on being efficient with capital and running lean, highly profitable operations that shareholders will reward. There are going to be news opportunities developing in the post Oil Bust world in places like Iran and Mexico. Yet growth opportunities for both firms may be rare as the overall size of the energy industry in terms of rig counts and other infrastructure metrics will likely take quite a while to return to pre-boom levels. Related: Can The Natural Gas Rally Continue?
For BHI and HAL then, the path to greater profits lies in outperforming and ultimately crushing smaller competitors. This will certainly include mom and pop operators, but it will also likely include smaller firms like Weatherford. Weatherford and its peers actually would have benefited from the BHI/HAL tie-up in many ways, and now face a more challenging road going forward.
On the other side of the coin, FMC Technologies and Technip appear poised to see their union blessed by regulators around the world. In the U.S. that has already occurred, but the tie-up will need the approval from other national regulators as well. The FMC/Technip merger was obviously much smaller than BHI/HAL, but at $13 billion it was still nothing to sneeze at.
Analysts have been deeply divided over the merger with some saying it is a bad deal for FMC shareholders, and others seeing more promise. Either way, the fact that U.S. regulators signed off on the deal early suggests that the pair won’t see much grief from regulators outside the U.S. either. Related: The One Chart That Shows Why Oil Prices Have To Keep Rising
None of that means that shareholders have an easy or obvious path to prosperity ahead of them. FMC and Technip both have considerable presence in the oil and gas sector, but Technip is focused mostly on engineering and construction projects, which carry large revenues but considerable cancellation risks. For FMC to retain its historical multiple levels, investors will need to be persuaded that the combined company will still have the stable revenues of a capital equipment company rather than the choppiness of an E&P firm.
Moreover, FMC and Technip shareholders should be watching critically to see if the combined firm’s management team is able to effectively unite the two firms. Mergers only really make sense if synergies or economies of scale can be created. Yet most realized synergy levels fail to live up to ex-ante expectations. That may ultimately prove the case with FMC Tech and Technip as well. Only time will tell.
The broader point for investors stemming from both sets of merger efforts is that the O&G sector is changing rapidly. No one knows what the future will hold for the energy industry as a whole, but different firms will have to take different roads to reward shareholders effectively going forward.
By Michael McDonald of Oilprice.com
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