Because of a huge $3 billion break-up fee, it's no surprise that Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI) are still entangled in their plans to merge. And although a reputable Jefferies analyst lowered his chances that the deal will come to be to 67%, the two companies are still bullish on this move.
Tune in, as Motley Fool analysts Tyler Crowe, Taylor Muckerman and Sean O'Reilly look into that deal and into the fourth quarter to see if the oil market will recover as some forecasters have projected it should.
Listen to the full podcast by clicking here. A full transcript follows the video.
Sean O'Reilly: Anything else piquing your interests this earnings season?
Taylor Muckerman: Not necessarily earnings season, but over the next couple quarters, Halliburton and Baker Hughes are still up in the air. It's a never ending argument. Going on now for just over a year...
O'Reilly: What's the longest it has taken regulators to approve something?
Muckerman: I don't know. They've been approved in Canada, Colombia, South Africa, Turkey; all these countries, but Australia is apparently voicing some negative opinions on the deal even though some of the assets these two companies are selling were based in Australia. Then a Jefferies analyst lowered their estimate to a 67% chance that this deal passes. Their focus was on Europe not approving it though.
Tyler Crowe: I was surprised to hear that -- not surprised that regulators have been pushing back on this a little bit because of how much market share the culmination of Baker Hughes and Halliburton have. I'm more surprised at the regions where we're seeing resistance.
If you look at Baker Hughes and Halliburton's portfolio, they're extremely levered to North America; the United States and Canada. My thought was, if we were going to see regulatory resistance it was going to be in the United States and Canada simply because so much of what they do is based in that area. Not surprised that it's happening, but surprised where it's happening.
Muckerman: The two companies are still very much bullish on the fact that it's going to go through.
O'Reilly: What's the breakup fee on that?
Crowe: $3 billion. So if it doesn't go through, Halliburton has to pay Baker Hughes $3 billion.
Muckerman: That's not going to make up for that market share that they've gained based on the deal acquisition. So the share price is still going to suffer if this doesn't go through.
O'Reilly: What's the over-under?
Crowe: Going into 2016, something I think that could be really interesting and worth watching is; watching what the capital spending habits of exploration and production companies. Most notably -- at least for me because I have a tendency to follow them a bit more as the big oil companies, and integrated majors -- so many of them built out five year development plans back in 2012/2013 that end in 2017.
We're getting close to that time. It will be interesting to see what those companies view for their future from 2017 out to 2020, 2021. It would be the next five year plan for them. If we have any indication of Chevron, they've been very bearish on their spending. In the next couple of years, if you look at one of the announcements they had in this past quarter was "We're going to trim." What's was estimated to be $35 billion this year in terms of total spending will be looking in the $20 to $24 billion range in 2017.
O'Reilly: Hefty cut.
Crowe: That's a big cut. $15 billion off your capital spending in two years. That's a really big deal. For investors looking forward, I think you could see a nice boom in terms of profitability for these companies in that 2017 range. All of these projects they just finished up are coming online and they're making a lot of money.
O'Reilly: They're also eating into reserves. Long term...
Crowe: Long term the question is, if you're not spending the money to develop, what's going to happen in that 2021 timeframe?
Taylor Muckerman owns shares of Halliburton. Tyler Crowe has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.