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The Strong Arm of Justice Puts a Hold on Halliburton-Baker Hughes Merger

By Tyler Crowe and Taylor Muckerman - Apr 11, 2016 at 2:33PM

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Halliburton's deal faces another hurdle. While solar and wind energy is not only changing the way in which we produce power, it's completely upending the whole electricity industry.

Last week, the U.S. Department of Justice filed a lawsuit for antitrust concerns regarding the perpetually delayed merger between Halliburton (HAL -0.56%) and Baker Hughes (BHI).

On this edition of Industry Focus: Energy, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe discuss how strong of a case the government has and what the two companies might do if the merger is postponed much longer. Also, the team looks at a trend that's been disrupting nuclear and coal for a few years now -- negative wholesale power markets in states that want to incentivize wind and solar -- and a few points investors need to remember about the energy space.

A full transcript follows the video.

This podcast was recorded on April 7, 2016. 

Sean O'Reilly: Wholesale power markets make Uber surge pricing look like a joke. All that and more on this energy and materials edition of Industry Focus.

Greetings, Fools! Sean O'Reilly here in Alexandria, Virginia. It is April 7, 2016, and we are here with Tyler Crowe and Taylor Muckerman. What is up, guys?

Tyler Crowe: Hello, hello, hello!

Taylor Muckerman: What's up?

O'Reilly: Before we dive in here, I do believe it's National Beer Day.

Crowe: I believe it is.

Muckerman: Some might say.

O'Reilly: Chris Hill told us, obviously, the host of MarketFoolery, told us.

Muckerman: He's on top of it; he's a whiskey drinker but he knows it's Beer Day.

O'Reilly: He sent out the message to all the podcasters, like, "You guys have to mention this." I think I know what Chris is doing later. But anyways.

Crowe: Let's do really quick, Mount Rushmore of beers for you guys.

O'Reilly: Oh, man.

Muckerman: Mount Rushmore of beers.

O'Reilly: So, I need four... now, does that imply that we need beers that were the founding fathers --

Crowe: No, just your four favorite beers.

O'Reilly: OK. A really good go-to is Sam Adams Boston Lager.

Crowe: Look at that, pitching Boston Beer Company already...

O'Reilly: It's a really good go-to; it's like my Budweiser, you know what I mean? That's what I'm going to say. That's my George Washington. My Thomas Jefferson is actually a beer whose recipe came from Thomas Jefferson's Monticello, and it's made by Yards Brewing Company, up in, I think, Philadelphia. It's Thomas Jefferson's Tavern Ale, and it's so, so good. The premium beer, I think they charge like, at Whole Foods, like $15 for this stupid beer. But Eric Bleeker and I, fellow Fool, love this. It's a West Coast IPA from -- oh, shoot, what's that California brewery? I'm really butchering this.

Muckerman: There's a lot of them. Sierra Nevada, Stone, Rogue.

Crowe: Man, he can't even come up with four favorite beers?

O'Reilly: I know it's a West Coast-style IPA, and I'm picturing the bottle and everything. And the last one is actually the Stone Enjoy By IPA, that's a good time too. They just brought that out, too. I just saw it at the store the other day, and they didn't have it in the winter, for whatever reason. Who's going next?

Muckerman: Tyler.

Crowe: I'll go. It's a beer out of Montreal called [La] Fin du Monde made by Unibroue, amazing Belgian-style tripel, can't get enough of it.

O'Reilly: Does it taste like Stella or anything?

Crowe: No, Belgian tripel style, so very...

O'Reilly: Dark.

Crowe: No, not dark. Very fruity, very nutty, kind of a little funky. I really like it.

Muckerman: Kind of a little funky.

O'Reilly: Kind of a little funky.

Crowe: I like those really out-there types.

O'Reilly: You heard it here, folks -- Tyler Crowe is a little funky.

Crowe: I like that kind of stuff. And then there's actually, I have to shout out to my hometown, there's a microbrew in my hometown of Littleton, New Hampshire, called Schilling, and they make some great stuff. I could drink anything on their slate and think it's amazing.

O'Reilly: All the things.

Crowe: Since there's three or four of them I really enjoy, we'll just say those guys encapsulate the other three.

O'Reilly: Cool.

Muckerman: All right. We don't have to compare them to the presidents, right?

O'Reilly: No, although I did do that, and I like to think I get bonus points.

Muckerman: OK. I like Goose Island Sofie, it's kind of a tripel Saison-style beer. I'm a fan of really anything from Ommegang. I like their large formats. I've got my Untappd app open here. Hopslam, if you really want to get that seasonal beer that disappears the fraction of a second the moment it's released, and you only want to drink one or two beers, that's my go-to. And then, I like, for sipping, my All Day IPA from Founders.

O'Reilly: Oh yeah! I lived in Grand Rapids, Michigan.

Muckerman: Was that four?

Crowe: Yeah. I have to say, though, just as an aside, we are living in peak beer. We are living in the greatest time for beer.

Muckerman: I don't know, it keeps going!

Crowe: Could you imagine...

O'Reilly: This is the Renaissance of beer. DaVinci is here, it's awesome.

Crowe: Imagine 30 years ago, when all you'd have is your choice between --

O'Reilly: Bud or Coors?

Crowe: Budweiser, Miller, Coors, something like that.

O'Reilly: Hanging out with the guys, have your Silver Bullet.

Crowe: Today, we're talking about 7,000 different beers, we have apps to track them. I can't think of a time, if you enjoy beer, there's not a better time to be alive than today.

Muckerman: When Trump gets put on Mount Rushmore, that's my Pilsner Urquell.

Crowe: (laughs

O'Reilly: (laughs) You went there!

Muckerman: That's my other go-to sipper, the green bottle from the Czech Republic.

O'Reilly: I had it on the tip of my tongue, I did look up the brewery that makes the West Coast IPA, it's Green Flash out of San Diego. That is a really special beer.

Crowe: Green Flash is a good beer.

O'Reilly: We actually need to talk about energy and materials, guys.

Crowe: No, can we just go for beer for 40 minutes?

O'Reilly: We could. Maybe we should get online and see... Anyways, first off, I think you sent me this story earlier. I don't know why I didn't know about this, but apparently, at certain times, I think it happened in California 12 times a year or two ago, but negative rates for power and wholesale power markets in certain states like California, Texas, it's happening a little bit in the Northeast. I was interested to read that it's basically a way to incentivize coal and nuclear plants to shut down. Taylor, can you add some color here? Are you nervous if you own a nuclear plant at this point? Negative rates. Telling you to shut your damn -- pardon my French.

Muckerman: I think my degree of nervousness would go coal, nuclear, natural gas, because coal is already on the decline. Coal companies are going bankrupt in the U.S., seemingly every month. Europe is severely waning on coal production, and they were the founders of coal power. You still have India and countries that are developing using coal, but slowing growth there. China is starting to seem like it's peaking on coal power production. That would be the most nervous I would be.

Crowe: It actually flatlined.

O'Reilly: Oh yeah, they're a little tired of the pollution, among other things. (laughs

Muckerman: Yeah, when you can't see five feet in front of your face, I think it's time for a wake-up call.

O'Reilly: I went to Beijing like five years ago, it's true, all of it, it's true.

Muckerman: You have reports of Zuckerberg going on the Smog Run when he was in China to talk about climate change, and obviously, Facebook getting into China.

O'Reilly: Did he actually go on a jog in Beijing?

Muckerman: Yeah, it was some of the leaders from China, and they called it the Smog Run, because the pollution was so bad. But, I mean, you had to expect this to happen sooner or later, because sun and wind -- well, sun is kind of predictable. The clouds, obviously, obstruct it a little. But wind is less predictable. You could have peak times of both at the same time, and you can't shut down a nuclear plant willy-nilly. So, yeah, I think it's time to start getting nervous, at least in states that have seen the most growth from both. I think if it's just solar or if it's just wind, you probably have a few years before you need to get worried. 

O'Reilly: At what point do nuclear plants and natural gas plants start complaining to the government--

Muckerman: They've been complaining.

O'Reilly: Yeah. But, granted, the cost of solar has gone down. I think we read it was like 1/150th of the cost of solar in the 1970s. (laughs) Do you guys remember that James Bond film, I think it was The Man With the Golden Gun?

Crowe: Oh yeah, I remember that.

O'Reilly: It was like, the Solex, the little gadget? Forty years later, we finally got our solar power like James Bond had.

Muckerman: The happening, yeah.

O'Reilly: But one of the reasons wind has been so big is because of these tax credits that have been going on. Buffett talks about them as part of his rationale for doing all the investments that he's done in solar.

Muckerman: It's funny, you see the tax credits get extended into perpetuity just so we could export oil. But how long is that oil exportation really going to be a big deal? We're still importing a ton, we haven't really exported -- I mean, we exported a fraction...

O'Reilly: We just started, a little bit.

Muckerman: Yeah. But I think, in the long run, obviously, those credits are going to be a much bigger deal to fossil fuels than oil exports are going to be.

O'Reilly: What have you heard? Are natural gas companies -- and, obviously, coal companies are...

Muckerman: Well, I think with natural gas, you can flip the switch on and off a little easier.

O'Reilly: Right. But if you're nuclear, at what point are you like, "What the heck, federal government?"

Muckerman: Yeah, I think long term, you're probably up a creek unless you can figure out a way to turn it off and on.

Crowe: And there isn't just one single nuclear company. Most utilities have some sort of diversified generation, because you have your base load, which is your nuclear power...

Muckerman: Exelon (EXC -1.02%), I think, is a good example. They're starting to grow renewable, but they are the largest nuclear power provider in the country.

Crowe: Right, so you have that base load power, and then you go into your more variable power sources like your natural gas and your solar and wind, so that when solar and wind are getting a lot of power from that, you've got that little bit of base load power from nuclear to support, and then on the peak times, which is basically when you start to get waning production from solar and wind during certain times of the day, then you can ramp back up with natural gas. Having that diversified generation portfolio can help offset having the issue of just being a pure nuclear player.

O'Reilly: Right. Utilities clearly just need to get in on the game in order to survive and make sure they're...

Crowe: Most definitely.

Muckerman: I went to the Pittsburgh Pirates-Cardinals opening day on Sunday, and we were obviously in coal country driving through Pittsburgh, and there was a huge billboard that was like, "Wind stops, suns set, coal is forever." And I was like, "Oh God, please tell me that billboard is a decade old." They're still trying.

O'Reilly: I can't believe somebody is still writing the check for that. Who's writing the check for that?

Muckerman: Coal companies, coal producers.

O'Reilly: Yeah, but they're bankrupt! What's going on here?!

Muckerman: Well, I don't think billboards are the highest-priced advertising model anymore. It's probably the lowest-hanging fruit to put a word out.

O'Reilly: Oh, it's like a dying model and a dying model teaming up! Oh, this is funny.

Muckerman: One would imagine, yeah. It wasn't even one of those flashy billboards that changes three different times as you drive by, it was just paper painted up there.

O'Reilly: (laughs) Just a straight-up billboard, yeah.

Crowe: This is actually kind of bringing it back to yesterday's MarketFoolery show, they had David Kretzmann on, and they were talking about the bankruptcy of SunEdison. I find the conversation between this and that very interesting, in the sense that we're basically talking about the astronomical growth of solar and wind to the point that...

O'Reilly: It's competitive.

Crowe: It's also throwing the electricity market on its head. But at the same time, you have these upstart energy companies rising and falling.

Muckerman: Yeah, the market hasn't caught on to the success yet.

Crowe: From an investor's standpoint, there's that weird point where: Where is the company you want to invest in that's really going to grow? And that's where I think it's so difficult, because -- and, this is going to be a weird analogy -- I feel like investing in solar, renewables, wind, things like that, it's kind of like the Royal Rumble in wrestling. I don't know if you guys know the Royal Rumble...

Muckerman: (laughs) Yokozuna was always my favorite.

O'Reilly: Taking us back to our pre-teen years. (laughs

Crowe: One guy comes in every minute or so, and it changes, completely disrupts, what's going on. And typically, the person that starts...

O'Reilly: And then somebody gets hit by a chair. (laughs

Crowe: Yeah, somebody gets knocked out with a chair, somebody gets thrown over the rope. And typically, the person that started in the fight isn't the last one in. And I feel like with the solar market, the renewable market, you do need to tread a little carefully in the sense of, don't put all your eggs in one basket, like, "This is going to be the company," because it's such a fast-moving industry that you don't know. There are so many things that could change in any given moment. We saw it with natural gas and the shale revolution -- all these companies thought they could make a ton of money on this, and then boom, collapse.

O'Reilly: They did for a few years. (laughs

Crowe: Well, they did make money. And then they lost it all. So you can't just say, "This is going to be the company." You need to hedge your bets a little bit. There is an opportunity there, but don't think one company will make it all happen.

O'Reilly: When you started talking about your point, the first thing that entered my mind was that age-old Warren Buffett-ism. Buffett avoids technology because technological advances do not necessarily mean you're going to make money. Sorry, but... heck, Morgan Housel had that article a year ago -- the No. 1 stock of the last 100 years in America was Altria.

Crowe: Making cigarettes.

O'Reilly: Demand has been dropping for cigarettes for 40, 50 years.

Muckerman: In the U.S.

O'Reilly: Taxes, lawsuits from the government, all this stuff, and it still beat everybody. So, yeah, tread carefully, folks. Actually, on that note, I did want to mention that we just learned, apparently -- and it seemed kind of unfair, but I think Mr. Crowe, you sent this article to me earlier from Bloomberg. It's called "Wind and Solar Are Crushing Fossil Fuels," and it talks about how expenditures in investing in wind and solar beat out fossil fuels by like two or three times or something like that last year.

Muckerman: Globally.

Crowe: We actually went over that last week, when we had our energy quiz that you kind of failed.

O'Reilly: Well, you know, I failed on purpose, along with the audience.

Crowe: Sure.

O'Reilly: It was a good time. But, it seemed unfair, when I read it, because obviously capex in oil and gas have been cut massively, to like, 60-year lows. I was like, "That's not quite fair."

Crowe: Yeah, and that's another general point for investors -- stories can be very cherry-picked sometimes. Before reading it and having a knee-jerk reaction, step back and take a look at it. When it says something like, "Yeah, it's outpacing oil's growth," like, yeah, but there is very little correlation between oil and solar. Oil is a transportation fuel and used for plastics, solar is mostly an electricity generation, and there's very little overlap between the two unless you want to talk about electric vehicles, which is .01% of the overall transportation market overall right now. It's going to grow, but it's not there yet. So when you see that, don't immediately go, "Oh man! Oil is down because of solar!" It's going to take time.

O'Reilly: Not only that, but oil and gas is already a multitrillion-dollar industry. You're not going to... (laughs) 

Muckerman: I think it's going to be at least a decade before this show is dominated by renewable energy talk.

Crowe: We'll still be talking about oil for a little while longer on this show.

O'Reilly: We need to make plastics! 

Muckerman: Well, we need oil to make plastics, until the sun can make plastic.

O'Reilly: That'll be good, yeah. We need to make our Apple cars that are electric. Before we head out of here, we would be remiss if we didn't mention the Baker Hughes...

Crowe: We have a lot of lawsuits going on right now.

O'Reilly: Yeah, what's going on?

Crowe: Lawsuits all over the place.

O'Reilly: A very litigious sector lately. 

Muckerman: There's been two mini-mergers and acquisitions proposed.

O'Reilly: Just a few. But, to the surprise of nobody at this table, the Justice Department filed a lawsuit for antitrust concerns for the proposed merger between Baker Hughes and Halliburton. Obviously, nobody here was surprised. Any things that surprised you from the announcement?

Crowe: Not a whole lot. I didn't think it would get so far that the Justice Department would actually sue. I thought that...

O'Reilly: They'd make them sell stuff.

Crowe: I thought what would end up happening was -- and this was my theory, and why I wasn't as totally on board with the idea. I thought that what was going to end up happening is, to make the merger happen, they would have to strip out so many parts to meet Department of Justice needs, that it wouldn't have been a whole lot bigger than the two separate entities in the first place. But it seems like Halliburton-Baker Hughes is still pushing on.

O'Reilly: They want to fight. They're going to fight it.

Muckerman: Halliburton is fighting it.

Crowe: I want to get Taylor more into this.

O'Reilly: They don't want to write a $3.5 billion check. (laughs

Muckerman: Well yeah, Baker Hughes can't say, "Screw it, we're done." Only Halliburton can do that, until the end of this month. Then Baker Hughes can be like, "This isn't worth it, we're done. Give us our money."

O'Reilly: (laughs) That seems likely to happen now, doesn't it?

Muckerman: Maybe, I don't know. They made a lot of changes.

Crowe: It wouldn't be the most absurd thing for Baker Hughes to step away and say, "We're done, give us our $3.5 billion, we'll take either all the debt off, or maybe we can go acquire a smaller oil services company."

Muckerman: Yeah, if oil prices were sky-high, they'd be like, "Please buy us!" But because they can go out and maybe buy some competitors...

O'Reilly: Well, there were some analysts, though, that said -- and I wanted to get your guys' thoughts on this -- in the Wall Street Journal article that I read about this, some analysts said Baker Hughes might struggle on its own if this doesn't go through. Is there any truth to that?

Muckerman: I mean, they were kind of compared to Halliburton and Schlumberger (SLB -1.90%). They were already struggling. And they've made a lot of changes, probably internally, to help this deal go through, and traditionally, I guess, the acquirer does better after a failed merger or acquisition. But these two compete head to head. Just handing your direct competitor $3.5 billion...

O'Reilly: On that note, there's actually a quote that I really wanted to read. Bill Baer, the Justice Department's Antitrust Chief, holds no punches in his criticisms of the merger. He said -- I couldn't believe this: "I have seen a lot of problematic mergers in my time, but I have never seen one that poses so many antitrust problems in so many markets." That's kind of a scathing indictment right there. What was it, there were like 23 markets they're worried about or something?

Crowe: Yeah. They are the number two and number three in the oil services industry. And when you bring those two together, you could say Weatherford International and Superior Energy Services are competitors...

O'Reilly: Who and who? (laughs) 

Crowe: Exactly! So, when you bring Baker Hughes and Halliburton together, you have pretty much a duopoly in the sector, and that poses a few more problems. At least with that third player, you get a little bit more pricing competition, that makes it a little bit more favorable to the entire industry, where somebody isn't going to get gouged.

Muckerman: I wonder, though, Schlumberger and Cameron, that was passed in like a day.

O'Reilly: It's been like a year and a half we've been talking about this.

Muckerman: And now they're an offshore monster on top of Schlumberger already being by far the biggest company in equipment and services in the oil field. When that passed, I was thinking, "OK, this has a much better chance." But now, it's like, what the hell?

O'Reilly: Yeah, unbelievable.

Muckerman: I mean, Halliburton has $10 billion in cash, so losing a third of it wouldn't be the best thing in the world, but it wouldn't necessarily put them in the...

O'Reilly: Right, they would not have agreed to it if they didn't think...

Crowe: They're not heading to the breadline after this.

Muckerman: No, absolutely not. It's just, it would be tough to see a competitor -- I'd liken it to T-Mobile, who received billions twice from Sprint over failed takeovers, and now look at them. They're the fastest-growing mobile company in the world.

O'Reilly: They made good use of that money. (laughs

Muckerman: Absolutely, they didn't decide to give a special dividend.

O'Reilly: What's Baker Hughes' market cap? Does anybody know offhand?

Muckerman: Uh... no.

Crowe: Not off the top of my head.

O'Reilly: I hate to do that to you guys.

Muckerman: That's what computers are for!

O'Reilly: That's fine.

Muckerman: Its market cap, currently...

Crowe: $20.39 billion.

Muckerman: There you go.

Crowe: Boom.

O'Reilly: So this is a significant chunk of change for them. That's like 15-16% of their worth.

Muckerman: Right. And they only have $2.3 billion of cash on the books.

O'Reilly: Are you interested in buying Baker Hughes now?

Muckerman: Not before this happens. I'm just going to stick to my guns with Halliburton and ride this out, because regardless of whether or not this deal goes through, the stock is probably worth more than it is if oil rebounds. I'm not worried as a long-term shareholder.

Crowe: And, going back to the long-term thesis on a lot of this, what was it, late 2014 when this deal was announced? And, I admit, some of us were guilty of getting caught up in it. But there's so much attention that's given to: Do you buy with the merger or do you sell with the merger? And there's so much talk when it comes to these sort of things of buy-sell-trade, it's very speculative. I mean, we've been talking about the story for a year and a half almost now, and it looks like it's going the other way.

If there were people out there who actually bought based on the acquisition and making them a powerhouse, if that is your thesis for making your investment, you might want to wait until the ink is dry, and you can see some operational performance on an acquisition before you really start to get into it. Don't automatically dive in on an announcement. Actually be a patient investor, and see a well-performing company actually hit its targets before you dive into something like this.

O'Reilly: Wise words. All right, thanks for your thoughts, guys.

Muckerman: Yeah, was that it?

O'Reilly: Let's go get a six-pack at Whole Foods.

Crowe: I think, National Beer Day, it's after noon now, we can start.

O'Reilly: Yeah. And not only that, but it's always noon somewhere.

Crowe: Exactly.

Muckerman: I've had a six-pack under my desk for like a year. 

O'Reilly: Just for this day.

Muckerman: (laughs) Exactly.

Crowe: On the National Beer thing, this is a family heirloom, I don't know if you guys will know this or not, but Jimmy Carter was the one who signed the laws that allowed micro-brewing to happen in the United States and changed the landscape for it. And his brother, Billy, brewed his own beer...

O'Reilly: Billy Carter! (laughs

Crowe: My grandfather has a six-pack of Billy beer at his house.

O'Reilly: Wow! What's the alcohol content on that thing? I want to see this beer!

Crowe: I mean, it's in a can, you can't see! But I wouldn't touch that stuff with a 10-foot pole.

O'Reilly: I would speculate that it would be terrible.

Crowe: It's probably gone bad by now.

O'Reilly: Yeah. All right. Well, that is it for us, Fools. Thanks for listening! If you're looking to reach out with questions or comments, we would love to hear from you, just email us at Again, that's As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. Don't buy or sell anything based solely on what you hear on this program. Fool on, everybody!

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Stocks Mentioned

Schlumberger Limited Stock Quote
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Baker Hughes Incorporated Stock Quote
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