Oppenheimer Says Take the Money and Run in Baker Hughes

Oppenheimer initiated coverage this morning of Baker Hughes

with a Perform rating and a 12-18 month price target of $71. Oppenheimer analyst James Schumm goes on to say: "Halliburton

is paying a fair value for acquisition target Baker Hughes, we believe,and we do not see any additional suitors sweetening the pot. The combination would create the largest oilfield services company in the world and pose a greater challenge to best-in-class Schlumberger. However, given the limited upside to deal closing in 2H15 and the substantial downside risk should the deal fall through, we recommend investors gain exposure to the combined entity through Halliburton instead. Despite the extensive overlap of the two businesses, we do believe the merger will be successful with Halliburton likely divesting $5 billion of assets to clear antitrust concerns. Initiating coverage on Baker with a Perform rating and $71 PT." KEY POINTS ■ The Deal: The proposed merger gives the company added scope and scale to more effectively compete with Schlumberger

. ■ Antitrust Issues? Given the substantial overlap and large market share positions, there is an above-average chance the BHI-HAL deal runs into fatal antitrust scrutiny. We believe the merger has a 75% probability of success. However, failurewould likely lead to a substantial drop in BHI stock. ■ Underlying Business Improving: Despite recent oil price weakness, standalone Baker Hughes is making substantial progress in improving the profitability of its largest business (pressure pumping). Also, a reduction in capital intensity is expected to lead to significant free cash flow generation which could support substantial buybacks and improve the balance sheet. ■ Valuation: We value the stand-alone Baker Hughes at $71 per share based on a 50/50 combination of 14x our 2015 EPS estimate (vs. 10-year avg. 14x). and 7x 2015E EV/EBITDA (vs. 10-year avg. 6.7x). Based on the merger terms, BHI is currently valued at roughly $65 per share. Mr. Schumm feels the limited upside in the stock price does not justify the downside if the deal falls through. Instead, play the deal through Halliburton which he believes will thrive in either scenario. Shares of BHI closed at 56.75, 25 percent below the $71 price target.