Is BHI-HAL Deal Reaction Justified from a Fundamental Approach?

Normally an acquisition deal is accompanied with a rise in acquired companys stock, whereas a
decline in the parent company stock.
Balancing the budgets for OPEC members will divide the vote on pricing oil at current prices.
Maintaining market share will tend to further lower the prices.
A cut in supply by the OPEC will stabilize prices, benefitting the overall oil sector.
Maintaining supply will benefit OPEC, but not the investors.

A typical acquisition deal results in an immediate rise in acquired companys stock while a decline in the
parent companys stock. Occasionally, a rise in both companys prices is observed which might occur due
to specific scenarios or synergistic benefits. But, in case of Baker Hughes (BHI) and Halliburton (HAL)
merger deal, a rise in both companies prices raises suspicion.
In this article, Ill be discussing some of the mainstream reasons for uncertainty around oil stocks. And in
the light of this discussion, Ill try to make a case for not investing in BHI merely looking at the stocks
recent appreciating trend.
As the 12 members of OPEC are expected to meet on the 27th of this month, what is to become of the oil
prices remains a mystery. With bulls and bears on oil futures advocating their sides of the story, it
becomes even more confusing as to identify the actual factors governing the supply and demand. This
must be, though, kept clear in mind that both supply and demand whether artificially or inherently
created will have impact on the price of oil.
Balancing the Budgets for OPEC Members will tend to Increase Price:
With Iran and Iraq, two of the main oil producers for OPEC, needing oil price to surge to about $100 to
balance their budgets, it will be difficult to draw consensus among OPEC members to further cut oil
prices. Similarly Algeria needs approximately the same level of price to balance its budget. Considering
this perspective, it is difficult to assume a unanimous decision coming out of the OPEC-meeting.
An Inclination to Maintain Market Share by OPEC will tend to further Decrease the Price:
Here, the cartel will face a tradeoff between asserting its power on influencing price or the volume of
sales. If the OPEC chooses to maintain its market share, it will have to increase oil supply at the expense
of prices. On the other hand, if it chooses to stabilize the prices, it will have to cut its oil production
supply. Among the OPEC members, Libya is of the view that OPEC should reduce its oil supply whereas
Kuwait deems this idea as not pragmatic. Kuwait expects the oil supply to remain at the current levels,
with market absorbing the additional supply and balancing oil prices all along. Both possibilities exist and
investors need to be vigilant in terms of making investment decisions.
What if OPEC Cuts its Supply:
If OPEC chooses to cut its supply, the immediate reaction would be a halt in the declining oil prices. At
the moment Brent crude oil is trading just above $80. Brent has seen a decline in price of more than $20

as the oversupply of oil is being absorbed by the market. If OPEC decides to take a hit in terms of market
share, it will help the OPEC members like Iran, Iraq and Algeria. It will also be beneficial for the investors
in oil industry as the prices will stabilize and start regaining the uptrend. Finally, the cut in supply will
help the shale oil producers as well by eliminating the pressure on the high-cost producers. Currently,
some of these high-cost producers are quitting oil production, while some have already halted further
exploration.
What if OPEC Does not Cut its Supply:
In the event that the OPEC does not cut its supply, prices will further fall. At this point, it is very difficult
to predict a balancing price as we are seeing a slowing growth in global economy. Nonetheless, a fall in
price is certain. This decline in price will put pressure on shale industry production, as the shale oil is
comparatively quite expensive than the conventional oil. OPEC Secretary-General Abdalla El-Badri said
at a conference in London on Oct. 29 that current oil prices could take 50 percent of shale oil output
out of the market as investment in higher-cost production dries up. The shale drilling boom showed
signs of slowing last week. Oil rigs sank by 14 to 1,568, Baker Hughes Inc. said. Contrarily, this will help
OPEC to maintain its market share; but at the expense of its members interests like Iran, Iraq and
Algeria. How these countries will react to such a proposition is hard to predict. But, this decision will
benefit OPEC, on average, in the short term at least.
The Benefit of Synergies will be to HAL, and not BHI:
The key benefit to Hallliburton will be a potential increment in its revenues by obtaining the knowhow
to boost volumes from the aging fields, a yet-unfulfilled gap in its portfolio. And the negotiated price
between the two companies for acquisition, though not explicitly stated, is expected to be below the
current market value for Baker Hughes. Again, this is not a good sign for the potential investors of BHI.
Final Remarks:
Given that the uncertainty surrounding the oil prices, there are equal chances of oil prices going in either
direction. Any claims of rising of falling prices will be based on either speculation or insider information,
both of which are illegal. Therefore, Ill recommend investors to wait and keep an eye on the outcome of
the OPEC-meeting in order to get a full picture for where the oil price is heading. This goes for BHI
investors as well that among such a peculiar environment, there is no reason to go bullish based on an
acquisition deal. This might have made sense if the oil prices were stable, but not right now.