Baker Hughes will use the $3.5bn breakup fee from its unsuccessful merger with Halliburton to cut costs, buy back stock and find other ways to weather the downturn in energy prices.
The three-step initiative announced today includes lowering costs through restructuring and efficiency improvements to generate savings of $500mn per year by the end of 2016. It also plans to buy back $1.5bn in shares and reduce debt by $1bn. Baker Hughes also plans to refinance its $2.5bn credit facility.
"As we implement these changes, we remain focused on running the business efficiently while capitalizing on our strengths as a product innovator to create new growth opportunities," chief executive Martin Craighead said in a statement. "More than even, our customers need to lower their costs and maximize production."
Yesterday the companies called off what would have been a $35bn merger, saying legal efforts by the US Department of Justice (DOJ) to block the deal for allegedly being anti-competitive were too difficult to fight.
The merger, announced within months of the start of the current market downturn that began in mid-2014, was aimed at catching up with the top oilfield service provider Schlumberger. While prices are up about 50pc today from the $30/bl low in the first quarter to over $45/bl, they are still below the levels that are economical to drill for most operators. US rig counts are down by nearly 80pc to record lows from the 2014 peak.
Baker Hughes' cost-cutting measures may not be enough to help it avoid further trouble, however. Moody's Investors Service has placed both the companies under review for a downgrade. The review for Baker Hughes will focus on its cash flow potential, "including the extent and timing of the anticipated cost reductions and broader structural changes to further reduce costs and improve efficiency," it said. Baker Hughes posted a loss of $981mn in the first quarter compared with a loss of $589mn a year earlier.
For Halliburton, the review will be look at its "increased debt leverage" amid "continuing weak demand for Halliburton's oilfield service offerings." Both companies currently hold an A2 credit rating, two notches below the top investment grade rating of Aaa.
Halliburton is due to report its first quarter earnings tomorrow, after delaying it from 25 April because of the merger deadline. But it has cut back on infrastructure that it maintained in anticipation of the merger, such as oil pressure pumping equipment, and cut another 6,000 jobs. It also took a $2.1bn charge on asset impairments and severance costs in North America, where revenue fell by nearly 50pc to $1.79bn.
Still, many expect the termination to be positive for both the companies. With the uncertainty behind them, they will be able to focus on operations and may be able to better navigate one of the worst oil market downturns in decades, instead of trying to overcome the regulatory hurdles to complete the deal.
"We think investors should buy share of both companies, given our view that a multi-year recovery in North American upstream spending will follow the current downturn, likely starting in late 2016 or early 2017," US investment bank Seaport Global says.
Oilfield drilling activity will start to recover by late this year or early next year as sharp reductions in capital spending has meant that "there is a clear shortfall between current annual consumption of oil with volumes sanctioned for development in 2015 and expected in 2016," said Lars Eirik Nicolaisen, partner for Norwegian oil and gas consultancy Rystad Energy.
Against a current annual global consumption of 34bn bl, projects capable of producing only 7bn bl of oil were approved in 2015 and another 14bn bl is expected this year. "If the industry were to be in a steady-state, these two metrics would be equal," Nicolaisen said.
