Kavitha Kumar, Lissette

Portocarrero, Carly Snyder

Agenda● Industry analysis

● Company analysis

● Ratio analysis

● Weighted average cost of capital

● Pro forma statements

● Merger Analysis

● Recommendation

Industry at a Glance

SWOT Analysis - Oil and Gas Field Services

Helpful Harmful

Inte

rnal

Ext

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Concentration of Oil & Gas Field Services

● Low

○ 4 largest operators accounting for less

than 30%of industry revenue.

○ An estimated 76.5% of industry

operators employ fewer than 20

people, and 94.6% employ fewer than

100 workers.

Capacity ● Specific factors driving demand for oil

and gas well drilling include:

○ Market prices of oil and gas

○ Production levels

○ Supply and demand for natural gas

○ Level of economic activity

○ Energy conservation measures

○ Alternatives to hydrocarbon-based

energy sources.

Stability of Cyclicality

● Highly Cyclical

○ A result of the industry being driven

by commodity demand and

corresponding price increases.

Price

● Low price of crude oil leads to lower

demand for services.

● The average industry profit margin is

projected to increase over the next five

years, and this trend will be driven by

persistent demand for high value-

added services.

Government and Regulatory Scrutiny

● Regulation is heavy and increasing

○ Offshore oil drilling will likely

experience weak growth due to

stringent permitting for new drilling

■ Expansion to other countries

with less regulation

● Fracking regulations are continuing to

increase

Demographics

The industry’s geographic spread reflects that

of the Oil and Gas industry extraction because

of the driving demand and importance of oil

and gas field support services.

● According to recent data, the number of

experienced petro technical professionals

(including geologists, geophysicists,

petrophysicists, and petroleum engineers) fell

again in 2013, and is now expected to decline

until the end of 2016.

Environmental Influences

Technological advancements have enhanced

environmental protection

● The EPA issued the first ever federal standard

aimed at curbing the methane emission from oil

and gas industry by 40% to 45% to below 2012

levels by 2025.

● Younger generations are more environmentally

conscious

● Restoring old well sites and creating artificial

reefs.

○ Rig to Reef’s policy

Life Cycle

● Industry is mature

○ R&D focuses on improving techniques

and automation

○ Industry’s major players are well

established

○ Global need for energy results in stable

demand for industry services

● Trends in rig counts are important to

investors in the oil and gas sector

● In recent decades, rigs have absorbed

new technological elements that

enhance their ability to operate in harsh

environments and reach oil at greater

depths.

Growth Assessment

Projected Growth Rates

Competitive Analysis● High and Increasing

○ Contracts are awarded on a

competitive bid basis.

■ Price

■ Quality of Service

■ Operational and Safety

Performance

■ Equipment Suitability

■ Location of Equipment

■ Reputation

■ Technical Expertise

○ Land- more competitive

○ Offshore- large international

companies

● US Companies face competition

from bids abroad

COMPANY ANALYSIS

Baker Hughes Inc. Overview● Oil and gas drilling services provider founded in 1987 as a result of a merger between Baker

International and Hughes Tool Company.

○ Headquartered in Houston, TX

○ Employs 39,000 people

○ Operates in 80 countries

● Work side by side with customers to engineer reliable application-specific products and

services that create more value from the reservoir.

○ Deep water unconventional hydrocarbons

○ Production and water management

Halliburton Company Overview● One of the World’s largest providers of products and services to the petroleum and energy

industries.

○ Headquartered in Houston, TX and Dubai, UAB

○ Employs 55,000 people

○ Operates in 70 countries

● Serves the upstream oil and natural gas industry throughout the life cycle of the reservoir.

○ Locating hydrocarbons and managing geological data

○ Drilling and formation evaluation

○ Construction and completion

○ Optimizing production throughout the life of the field

SWOT Analysis

Strengths- High-Efficiency Drill Bit Business -Growth Strategy-Increased Spending

● Nova Technology

Weaknesses- Organization by Product Segment

Opportunities-Higher Oil Prices-Lower Output from Mature Wells

Threats-Seasonal Storms-Slow Production-Competition-Turbulence in Middle East-Renewable Energy

Strengths-Extensive Market Coverage-High Level of Int.Exposure-Acquisitions

● Geo-Logic Systems

Weaknesses-Incorporated in US-KBR-Revenue Dependent on Drilling

Opportunities-Higher Oil Prices-Optimizing Production-Shift to Natural Gas

Threats-Geopolitical Instability-Acts of Terrorism-Regime Changes-Downturns in US Economy-US Environmental Changes-Competition

BAKER HUGHES INC. HALLIBURTON CO.

DuPont Analysis

● Negative ROE is a result of a number of

charges due to the restructuring of both

companies.

○ ROE was positive in 2014

● Halliburton always has a high debt to equity.

● Using assets to highest capacity.

Ratio Analysis

Capital Structure

Calculating Cost of Debt

Cost of Equity

Weighted Average Cost of Capital

Firm Valuation

Firm Valuation

Factors affecting Growth Rate

Expected Demand and Consumption Oil Prices

Analysts Prediction: Production freeze/cutEIA Report

BHIPro-forma: Income Statement and Balance Sheet

HALPro-forma: Income Statement and Balance Sheet

MERGER“NOT FIXABLE AT ALL”

The Merger● November of 2014, Halliburton entered into a contract for a cash and

stock acquisition of Baker Hughes.

○ Baker Hughes valued at $34.6 billion

● DOJ filed a lawsuit to stop the merger, claiming that it would leave only 2 dominant suppliers in the services industry.

● April 2016 both companies called off the merger because of opposition.○ Baker Hughes now valued at $28 billion○ Halliburton forced to pay $3.5 billion in breakup fees

Good and the Bad of the Merger

● Highly important for services companies to offer the lowest prices.

○ The merger will allow for Baker Hughes/Halliburton to be more cost efficient

● Good for Baker Hughes and Halliburton because it will allow them to become financially strong

● Bad for the oil and gas field services industry because will result in a monopoly takeover by Schlumberger and Halliburton/Baker Hughes

○ Result in lesser innovation and competition in the industry

Cost Synergy

Ratio Analysis

Questions?