Heed The Oil Patch's Smart Sellers

HEARD ON THE STREET (via Dow Jones Newswires), Sept. 2, 2009

Corporate chiefs usually aim to sell out when businesses are showing their brightest potential. Could it also be smart to find an exit when there's no light at the end of the tunnel?

That appears to be the strategy of BJ Services, which Monday sold itself to larger energy-services firm Baker Hughes for $4.8 billion in cash and stock valued at Monday's close. Natural gas prices have recently clung near multiyear lows, stifling demand for the pressure pumping BJ Services uses to extract the fuel from drilling wells.

Where does that leave BJ Services' shareholders? With the payment coming mostly in Baker Hughes shares, they've been given a chance to participate in an eventual recovery. But Baker Hughes will have a vastly different profile than BJ Services, with just 20% of its revenue from pressure pumping. And so far, BJ Services' shareholders have instead shared in Baker Hughes' misery.

The offer initially carried a 16% premium for BJ Services. But Baker Hughes shares fell nearly 10% Monday, meaning the offer is now just 7% above BJ Services' closing price Friday.

Baker Hughes shareholders have reason to be cautious. One gauge of demand for new wells is the number of rigs in operation. Brad Handler of Credit Suisse says there are currently 999 drilling rigs working in the U.S., down from a recent peak of 2,031 about a year ago.

There's no obvious catalyst to drive drilling demand. Even if the economy recovers, rig usage has historically been prone to long slumps, such as the second half of the 1980s.

That makes the deal a big gamble for Baker Hughes, with a market capitalization of only $10.7 billion. And if BJ Services has decided it's time to exit, investors should also worry about what that means for the prospects for gas producers.  

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