Don't Forget, Baker Hughes Will Have $5 Billion In Cash By This Fall And Could Buy Back Stock

A Citi analyst said there is more than 50/50 chance of approval of Baker Hughes Incorporated BHI's $35 billion merger with Halliburton Company HAL and Baker would have "plenty of cash to reboot the organization" if the deal is broken.

A recent New York Post report said Halliburton is "making a last-ditch bid" to save the deal. Baker stock dropped about 5 percent on the report that the DoJ will likely block Halliburton's bid.

Shares of Baker Hughes were recently up more than 8 percent at $42.85, while Halliburton was up about 6.6 percent at $36.68.

Related Link: It's Official: DoJ Will File Suit To Block Baker Hughes-Halliburton Merger

"We rate BHI Buy as we believe there is a slightly better than 50/50 chance of approval given our view that HAL is willing to sell a substantial number of businesses and a buyer could be found to purchase the assets to create a large competitor, both of which regulators will likely require," analyst Scott Gruber wrote in a note.

Though the analyst admits the stock would likely fall if the deal is blocked by regulators, he estimates Baker Hughes would have over $5 billion of cash versus $4 billion of debt if the deal breaks by the third quarter of 2016.

"With the cash BHI could execute their own ‘Frac of the Future' to lift the performance of its frac business. New talent could also be attracted to the company. Finally we believe a large buyback could be likely given the cash balance," Gruber noted.

Assessing fair value under a scenario where the deal does not proceed, the analyst said material restructuring at Baker Hughes is restricted by the merger agreement but significant costs (likely about $500 million) could be extracted. If achieved, the incremental could be impressive during recovery, the analyst added.

"On a stand-alone basis our DCF points to $39 fair value and 14x our 2018 EPS estimate of $2.90 equates to $41 (we discount this figure by 10% In our target price methodology). So in a scenario where the deal is off, we believe investors should look for potential upside to these levels, all else equal," Gruber highlighted.