The big news out of the energy patch this week is Halliburton’s (NYSE: HAL) $35 billion purchase of rival Baker Hughes (NYSE: BHI), announced Monday. Halliburton is so committed to getting this deal done that the world’s second-largest provider of oilfield services tacked a $3.5 billion breakup fee onto the deal if it cannot get done due to regulatory concerns.
Thanks to lingering weakness in oil prices, the Market Vectors Oil Service ETF (NYSEArca: OIH), an ETF that devotes nearly 17% of its combined weight to Halliburton and Baker Hughes, has fallen 1.3% this week. The rival iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ), which devotes a combined 16.2% of its weight to Halliburton and Baker Hughes, is off 1.5% this week.
Predictably, oil prices loom large for ETFs like OIH and IEZ and it is those low oil prices that are seen as key motivator behind the Halliburton/Baker Hughes deal as well as further deal-making in the industry. [Oil Services ETFs Get Some Good News]
“Primarily, S&P Capital IQ views the move as a defensive one based on the macro concern that crude oil prices might weaken further. As of today, West Texas Intermediate crude oil is selling for about $75 per barrel, down from more than $100 per barrel earlier this summer. At a $75 price point, we think most shale plays in the U.S. are still economic for upstream customers. However, based on data from Bentek Energy (a unit of McGraw Hill Financial, as is S&P Capital IQ) if prices were to fall another to the $60 per barrel range – which is just a 20% move away – all of a sudden, the economics don’t look quite so rosy, with a smaller subset of plays still worth pursuing, and others not,” said S&P Capital IQ in a new research note.
With fears rising that oil decline could be one of the protracted variety, oil services consolidation could increase as larger firms look for cost synergies. S&P Capital IQ identified Weatherford International (NYSE: WFT) and Superior Energy Services (NYSE: SPN) as potential takeover targets in the oil services group.
Weatherford “is a company that two years ago was attempting to compete as a fully diversified peer to industry leader Schlumberger (NYSE: SLB), as well as Halliburton and Baker Hughes. In November 2013 it announced some intended strategic changes, and today, WFT is aiming to compete in what it deems core product lines, where it has sustainable and attractive operating margins, and divesting non-core product lines where it does not. In the third quarter, WFT achieved an average operating margin in its core product lines (well construction, completions, production systems, and reservoir evaluation) of about 17%. This compares pretty favorably with non-core asset operating margins of less than 3%,” said S&P Capital IQ.
Weatherford has long been mentioned as a takeover target and for its part, Superior has been more acquirer than seller. The two stocks combine for nearly 5.7% of OIH’s weight and 4.9% of IEZ. S&P Capital IQ has an overweight rating on the $421.5 million IEZ. [No Love for Oil Services ETFs]
Other sources have highlighted National Oilwell Varco (NYSE: NOV) as a target as well. With a market value of nearly $31 billion National Oilwell Varco could command north of $40 billion in a takeover, though that also pares the number of legitimate buyers. The stock is the third-largest holding in both OIH and IEZ. [Oil Services Need More Help Than M&A Provides]
iShares U.S. Oil Equipment & Services ETF
