CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Halliburton Company's (Halliburton; NYSE:HAL) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'A-' following the announcement of its acquisition of Baker Hughes Inc. (Baker Hughes; NYSE:BHI) for a total consideration of $38 billion. The company's Short-term ratings were affirmed at 'F2'. The Rating Outlook remains Stable.
Approximately $7.8 billion of debt is affected by today's rating action. A full list of rating actions follows at the end of this release.
The Stable Outlook reflects the expected maintenance of leverage metrics consistent with the current 'A-' rating given management's intention to fund the $34.6 billion equity portion of the transaction with approximately 24% cash and 76% stock. Fitch estimates, assuming 100% of the cash portion is debt-funded, proforma LTM debt/EBITDA, as of Sept. 30, 2014, to be 1.6x with and 1.9x without the nearly $2 billion in identified cost synergies. Fitch recognizes that improving EBITDA and free cash flow trends and potential for asset sales could lessen the final acquisition debt burden.
$38 BILLION ACQUISITION ANNOUNCED
Halliburton and Baker Hughes announced today that they have reached a definitive agreement under which Halliburton will acquire all outstanding shares of Baker Hughes for $34.6 billion ($38 billion enterprise value) in a cash and stock deal.
The companies are complementary and management estimates that nearly $2 billion of annual cost synergies are achievable. Roughly two-thirds are anticipated to come from operational and organizational efficiencies with the remaining one-third coming from R&D optimization, corporate, and real estate cost-savings. Management believes integration is achievable by the second half of 2017, or about two years post-close.
The deal will improve on Halliburton's leading position in the fragmented North American oilfield services market, which may help moderate margin pressure in a weak oil & gas pricing environment. Fitch understands, however, that geographic diversification will remain substantially unchanged with North America representing approximately 50% of revenues. Management believes the added scale and, in some cases, technological enhancements will allow the combined company to better compete internationally.
KEY RATING DRIVERS
Halliburton's ratings consider its leading position in the oil & gas services sector, positive trends for U.S. oilfield service providers, strengthening international operations, favorable medium-term outlook for offshore service providers, and manageable proforma leverage profile. These considerations are offset by the possibility for efficiency- and overcapacity-driven U.S. onshore market weakness, softening offshore market over the near term, heightened execution and political risk across some international markets, increased focus on returning cash to shareholders, and recent oil price weakness that could be a near-term headwind for onshore service providers.
MANAGEABLE FINANCIAL PROFILE EXPECTED
The Fitch calculated proforma LTM leverage, as of Sept. 30, 2014, is estimated to be 1.6x with and 1.9x without the $2 billion in identified cost synergies. This assumes 100% of the roughly $8.4 billion cash portion of the transaction consideration is debt-funded and no balance sheet cash or asset sale proceeds are applied toward payment Fitch recognizes that improving EBITDA and free cash flow trends and the potential for asset sales could lessen the final acquisition debt burden.
Fitch expects the financial profile to show improving trends from the proforma LTM leverage metrics as integration progresses, the benefits of scale are realized, and global oil & gas pricing strengthens. However, Fitch understands that Halliburton's cash flow profile has benefitted considerably from the growth in U.S. shale activity and a material pullback could pressure the rating.
Fitch forecasts Halliburton, on a stand-alone basis, to be considerably free cash flow positive for the years ended 2014 and 2015. Shareholder and other M&A initiatives should slow through deal close/integration resulting in cash balance improvements. Fitch anticipates any shareholder initiatives to be funded with surplus free cash flows.
ADEQUATE LIQUIDITY POSITION
Halliburton had cash and equivalents of $2.0 billion, as of Sept. 30, 2014, with $107 million held by foreign subsidiaries, which would be subject to U.S. tax if repatriated. The company intends on reinvesting these funds internationally. Additionally, the company had $280 million in fixed income investments, as of Sept. 30, 2014, consisting of municipal bonds, corporate bonds, and other Level 2 debt instruments.
Supplemental liquidity is provided by the company's $3 billion senior unsecured credit facility due April 2018. No revolver balances were outstanding as of Sept. 30, 2014. Further, the company maintains a commercial paper program consistent with the size of the credit facility that has not been materially utilized historically and does not currently have an outstanding balance.
MANAGEABLE MATURITIES PROFILE AND OTHER LIABILITIES
Over the next five years, Halliburton has $600 million, $45 million, and $800 million of debt maturing in 2016, 2017, and 2018, respectively. These represent the company's 1% senior notes due August 2016, 7.53% senior notes due May 2017, 2% senior notes due August 2018, and 5.9% senior noted due September 2018. The company is not subject to material financial covenants. Other covenants consist of lien limitations and transaction restrictions.
The company had over $4.5 billion in other contingent obligations on a multi-year, undiscounted basis as of Dec. 31, 2013. These obligations consist of purchase commitments ($3.5 billion), noncancellable operating lease payments ($946 million), and other, primarily pension-related, obligations ($54 million).
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Further improvement in North American results, on an activity and pricing basis, suggesting strengthening market conditions;
--Progress in achieving greater geographical diversification that reverses North America's increasing proportional share of consolidated revenues/margins;
--Mid-cycle debt/EBITDA of 1.0x - 1.25x on a sustained basis.
Positive rating actions are a possibility over the medium-term and will be closely linked to the successful integration of the Baker Hughes operations and achievement of leverage profile improvements.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Prolonged period of depressed market pricing and/or activity levels that leads to a weak oil & gas services outlook;
--Acquisitions and/or shareholder friendly actions that are inconsistent with the capital structure and expected cash flow profile;
--Debt/EBITDA over 2.0x on a sustained basis.
Halliburton's proforma leverage profile is consistent with the current 'A-' rating. Fitch does not anticipate a negative rating action over the near-term without a material change in the proposed financing structure, substantial integration issues, and/or persistently weak market pricing environment.
Fitch has affirmed Halliburton's ratings as follows:
Halliburton Company
--Long-term IDR at 'A-';
--Senior unsecured notes/debentures at 'A-';
--Senior unsecured bank facility at 'A-';
--Short-term IDR at 'F2';
--Commercial paper program at 'F2'.
The Rating Outlook remains Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage (May 28, 2014);
--Updating Fitch's Oil and Natural Gas Price Deck (Aug. 8, 2014);
--North American Energy Outlook and LNG (July 16, 2014);
--Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact) (Feb. 4, 2014);
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors (Aug. 12, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Fitch Raises Crude Oil & U.S. Natural Gas Price Deck
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=201134
North American Energy Outlook and LNG
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751784
Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733556
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and Services Sectors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715859
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=926036
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