Why is Halliburton Buying

Baker-Hughes?
www.bbk.io/hannaha

Roadmap
Industry Overview
Company Considerations
HAL + BHI
Trade Idea
Appendix

INDUSTRY
OVERVIEW

Key Macroeconomic Trend:

Persistent 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
World Oil Demand & Supply Growth Rates

Source: US Energy Information Administration

WTI Crude Oil Prices ($/bbl)

Competitive Landscape

*2013

COMPANY
CONSIDERATIONS

What is Halliburton?
World's #2 oileld services (OFS) rm
Delivers upstream-related products & services to
oil and gas producers
Exploration
Development
Production

Business Model
Completion & Production
Pressure pumping (~45% of HAL total
revenue; ~20% CAGR for demand)
Articial lift (~5%)

Drilling & Evaluation

Greater revenue stream diversication
D&E Revenue by Product Line

Sources: Barclays research, company nancials

Revenue by Operating Segment

D&E
40%
60%
C&P
C&P Revenue by Product Line

Geographic Operations
High concentration in North America (~52% of total revenue)
Well-diversied across international regions
No country comprising above 10% of revenues, besides US
Historical diversication: incremental increases from 2011
Incremental increases of int'l revenue ratio expected to continue
Int'l revenues forecasted to exceed 50% of total from 2014
Revenue by Geographic Region

17%
18%

52%

13%

Sources: Barclays research, company nancials

International Revenue

Headline Operating Metrics

Decreasing rate of revenue growth

EBIT & Margin

Increasing diversication of revenue

stream by region & operating segment
Steadily declining EBIT & margins
EBIT margins: from 19% to 11% over 3 yrs
Rising costs (guar gum), pricing pressures
in US, & non-recurring charges (Macondo)
Revenue Growth by Geography

Revenue Growth by Operating Segment

Gearing Metrics
Net Debt / EBITDA (x)

Increasing 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 ($m)

Debt / Equity (%)

Financial Forecasts ('14E-'18E)

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
Sales & Growth

EBIT & Margins

Peer Relative Share Price

Performance (Last 7 Months)

HAL + BHI

HAL + BHI
The WHY
Overcome falling oil prices & increased regulations
Overcome [rm-specic challenges]
The

GOAL

Increase growth, margins, and returns

Expand product portfolio & geographical reach
Diversify risk across geographies & product segments
Narrow the gap between HAL (#2) and SLB (#1)

The HOW
Potential COST synergies (~$2b p.a. post integration)
Potential REVENUE synergies

Potential $2b p.a. Cost Synergies

Improve local & international operational eciencies (50%+ of cost synergies)

Eliminate overlap in key, high-cost product areas
Streamline administrative/organizational structure
Optimize R&D
Source: Halliburton investor presentation

Potential Revenue Synergies

Expansion of Product Portfolio

Expedited Extension of Geographic Presence

Faster, more cost eective market penetration
vs. organic "product-line-by-product-line" approach
Highlight: resource-rich Canada and Russia, smaller int'l markets
Source: Jeeries and Oppenheimer research

Challenges

Worldwide 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

Cultural 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 aect operations

Other Challenges
HAL-SLB Gap Still Large
HAL + BHI
Potential enhanced competitiveness in NA & Russia
SLB
Superior 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 eciency measures

Transaction Summary & Analysis

Merger Remedies

Financial Effects

TRADE IDEA

Discounted 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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