DEAL REPORTER
Halliburton drill bits divestiture could attract global industrial companies
• PE firms, oilfield strategics will also be in fray
• Rare opportunity for large-scale oilfield technology assets surfaces from DoJ review
When Halliburton (NYSE: HAL) puts several business lines up for sale later this spring, its drill bit unit will likely attract bids from international industrial concerns as well as the expected private equity-backed enterprises and large oilfield services strategics, said two industry bankers and a private equity investor. Halliburton should see fierce competition for all its planned divestitures because few healthy oilfield services businesses are coming to market, they said.
The company announced on 7 April that it would divest three segments as a result of an antitrust review on its pending USD 34.6bn merger with Baker Hughes (NYSE: BHI). It said it would separately market its fixed cutter and roller cone drill bits, its directional drilling business, and its logging-while-drilling/measuring-while-drilling (LWD/MWD) business.
An an analyst said the Halliburton drill bit unit could be valued at USD 1.5bn.
Industrial attention
The Halliburton unit is sizeable enough for a business looking to make a new incursion into energy services to instantly establish itself in the space. Those companies are more likely to have an eye on the long-term growth prospects of such a move, and could bid aggressively as a result, they said.
Industrials companies that manufacture components and equipment, especially those that already serve other areas of oil and gas or mining, would have a natural fit with drill bits, said the first and second banker. Even if they do not already make drill bits, some of their expertise would transfer over and they could potentially see synergies -- although the third banker acknowledged it would be something of a risk if drill bits were a completely new venture for them.
The sources all noted that it would be impossible to predict every name that could get involved the auction process, which has not yet begun.
General Electric’s (NYSE: GE) subsidiary GE Energy lists directional drilling among a number of oilfield services products on its website, but the industry analyst said GE's oil and gas platform does not yet operate in the drill bits category.
Among industrial companies in adjacent fields, German industrial conglomerate Siemens (FRA: SIE), known for its automation, building, and power generation technologies, could decide to make the jump into drill bits, said the first and second bankers. It is involved in a USD 6.4bn bid for Dresser-Rand, which provides oil and gas production and power generation equipment including valves, compressors, turbines, and engines. However, the second banker added that the ongoing deal might preclude Siemens’ involvement in a new auction process.
Sandvik (STO: SAND), a Swedish industrials company, acquired Carrollton, Texas-based Varel International Energy Services for USD 740m last year, noted the second banker. It is in prime position to add on to Varel’s drillbit business, they said. At the time of the acquisition, Sandvik announced that Varel would “become a platform for Sandvik to expand into the upstream oil and gas industry.” Since that acquisition, it has made two divestitures, stating that it would focus more on the energy sector.
Dover Corporation (NYSE: DOV) could take a look at adding drill bits to its energy segment, which provides equipment such as bearings, artificial lift, and pumps to oil and gas customers, said the first banker. Dover recently announced it would sell its Sargent Aerospace and Defense business to RBC Bearings for USD 500m, and if that deal closes as planned in the second quarter, it would have more liquidity for buys, the banker noted. The company reported USD 681m in cash on its most recent balance sheet and an undrawn USD 1bn credit facility. Dover touted strong revenue growth in its Drilling and Production segment during its January earnings call; CEO Robert Livingston said that while energy M&A in the near term would be “a bit uncomfortable”, he added that by the second quarter he expected the company to be able to “make a decision or two”.
ABB (VTX: ABBN), a Swiss industrials company, has an oil and gas segment providing equipment and machinery to onshore and offshore oil and gas, and could be another bidder, said the industry source.
Strategic bidders
A number of strategic oilfield services businesses with acquisitive histories will likely also show interest in Halliburton’s first round of divestiture opportunities.
National Oilwell Varco (NYSE: NOV) has historically grown by acquisition and has a line of drilling and intervention tools including drilling motors and drill bits, said the second industry banker. He said he would expect NOV to be in the race, especially since it has about USD 700m in US cash, USD 2.4bn available on its revolving line of credit, and USD 2.9bn in overseas cash that it can borrow against.
NOV and Superior Energy Services (NYSE: SPN) have both been vocal this year about acquiring drill bits and directional drilling operations.
On its 4Q14 earnings call, Superior Energy CEO David Dunlop said the company’s 2010 acquisition of Baker Hughes’ stimulation and sand control business for USD 55m was also a Department of Justice-mandated noncore Baker Hughes asset sale “that put [Superior] in the completions business”.
Superior Energy spokesperson Paul Vincent said the Baker Hughes/Halliburton merger “will forever change the oilfield services market” amongst the top strategic participants, of which Superior is included. “Any strategic on the planet should be interested in these assets,” Vincent said, but he declined to comment on whether Superior would be interested in participating in an active process for Halliburton drill bits or other assets subject to the DoJ review.
GE Energy could take a run at the drill bits business or any of the other mandated divestitures, said the second banker and the analyst. GE recently announced that it would restructure to focus more on its industrial businesses; it plans to sell most of its finance unit, GE Capital, and it has announced a deal to sell most of its real estate, and it will return some of the capital to shareholders. A bid on any of Halliburton's businesses would solidify its position in the industrial and energy services and take it into a new energy subsector, the sources said.
Schlumberger's (NYSE: SLB) size in the drill bit space rule it out as a buyer, the sources said.
PE pursuit
At the same time, private equity will be in hot pursuit of a business like this, said all of the sources. Just like the strategics, they will see it as a prime platform for future growth -- a product line that Halliburton would not have sold if regulators had not forced the sale. PE firms have a lot of capital to put to work in oilfield services, they noted.
TPG Capital, KKR, Energy Capital Partners, Macquarie Infrastructure, Intervale Capital and First Reserve would also take a look.
Halliburton, GE, Dover, NOV and Sandvik representatives did not return phone messages seeking comment. Siemens and ABB declined to comment.