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Rating Action:

Moody's reviews Halliburton for downgrade

27 Oct 2015

Approximately $7.8 billion rated debt affected

New York, October 27, 2015 -- Moody's Investors Service (Moody's) placed Halliburton Company's ratings on review for downgrade, including its A2 senior unsecured rating and its Prime-1 short term rating.

This rating action is in response to the increasing probability that the cash portion of the $19.00 per share cash component -- around $8.3 billion - of Halliburton's agreement to acquire Baker Hughes Incorporated (BHI) is likely to be permanently debt financed. Given the deep downturn in the industry as a result of the late-2014 collapse in crude oil prices and its negative impact on profitability, the extent of this incremental debt financing will make the Baker Hughes (BHI, A2 review for downgrade) acquisition more leveraging than envisioned at the original date of its announcement.

Moreover, while regulatory approvals may ultimately require substantial asset divestitures, it appears that Halliburton is more inclined to favor the use of asset sale proceeds to fund additional share repurchases over debt reduction. The combination of an increase in debt to finance the cash portion of the BHI acquisition together with a professed desire to resume share repurchases compounds the impact that market weakness is inflicting on Halliburton's prospective credit metrics.

The review will assess Halliburton's ability to successfully address the global regulatory scrutiny that this transaction has attracted, recognizing that Halliburton has committed to pay a $3.5 billion fee to BHI should the transaction terminate due to a failure to obtain required antitrust approvals. Financing plans and share repurchase clarity will further influence the review.

Moody's expects the review to be concluded upon the closing of the BHI acquisition, which can be extended under the merger agreement to April 30, 2016 if necessary. Given the size, scale and presumed increased market share of the combined company, Moody's expects a one-notch downgrade in Halliburton's senior unsecured rating to A3, and moving the short term rating to Prime-2, to be the most likely outcome of the review.

On Review for Downgrade:

..Issuer: Halliburton Company

....Senior Unsecured Regular Bond/Debenture (Local Currency), A2, Placed on Review for Downgrade

....Senior Unsecured Shelf (Local Currency), (P)A2, Placed on Review for Downgrade

.... Commercial Paper (Local Currency), P-1, Placed on Review for Downgrade

....Subordinate Shelf (Local Currency),(P)A3, Placed on Review for Downgrade

....Junior Subordinate Shelf (Local Currency), (P)A3, Placed on Review for Downgrade

....Pref. Shelf (Local Currency), (P)A3, Placed on Review for Downgrade

....Senior Unsecured Medium-Term Note Program (Local Currency), (P)A2, Placed on Review for Downgrade

Outlook Actions:

..Issuer: Halliburton Company

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Halliburton Capital Trust I

....Backed Pref. Stock Shelf (Local Currency), (P)A3, Placed on Review for Downgrade

Outlook Actions:

..Issuer: Halliburton Capital Trust I

....Outlook, Changed To Rating Under Review From Stable

RATINGS RATIONALE

On November 17, 2014, Halliburton announced that it had reached an agreement to acquire BHI in a cash and stock transaction valued at the time at $34.6 billion. The transaction was approved by both companies' boards of directors, and received the approval of each companies' shareholders on March 27. The combination of the world's second and third largest oilfield service providers creates a company with even more substantial size, scope and global reach with which to compete across the oil and gas producing industry. Complementary businesses and increasing international clout will provide Halliburton a larger platform from which to defend its market share in the global energy downturn, and to better capitalize on its eventual recovery. Halliburton's pending acquisition of BHI, the world's third largest oilfield services provider, will more firmly cement number two Halliburton's position globally, enhancing the combined Halliburton/BHI's ability to regain earnings momentum in the advent of a cyclical recovery.

The acquisition has been assumed to close by year-end, but the merger agreement can be extended to April 30, 2016 if necessary. With the $19.00 per share cash portion of the total consideration approximating $8.3 billion to be largely debt financed, Moody's expects pro forma leverage for the combined entity to increase from 1.9x debt/EBITDA for Halliburton on a stand-alone basis at September 30 (and BHI's 2.0x), to around 2.75x in 2016 (all leverage statistics reflect Moody's standard adjustments). Pro forma leverage has weakened since the acquisition was first announced in line with weaker EBITDA, a function of the dramatic fall off in upstream E&P spending in response to the collapse in crude oil prices. Halliburton expects the combined companies to realize approximately $2 billion in cost synergies, which Moody's believes will help restore debt/EBITDA back towards the 2x level in a cyclical recovery.

The merger has drawn intense regulatory scrutiny across product segments and geographic jurisdictions. The merger agreement anticipates this, and Halliburton has announced several asset packages for sale, which are in negotiation. Halliburton's credit profile would be stronger and debt leverage at the outset might be more rapidly improved if the company used asset sale proceeds to reduce debt levels, postponing share repurchases into periods of greater market prosperity. Moody's does recognize, however, the extent to which Halliburton consistently generates positive free cash flow notwithstanding oilfield service market cyclicality.

Halliburton has good liquidity. At September 30, the company had $2.25 billion of cash and marketable securities and full availability under its $3.0 billion senior unsecured revolving credit facility, which has a July 21, 2020 scheduled maturity. The revolver will increase in size to $4.5 billion following the closing of the BHI acquisition. No commercial paper was outstanding under its Prime-1 rated commercial paper program, which is fully backed by the revolving credit facility.

The review for downgrade will focus on the challenges Halliburton faces as it confronts intense regulatory reviews, the need to negotiate sizable asset dispositions and the execution risk involved in closing a substantially sized acquisition in the face of challenging oilfield service market conditions, as well as a potential resumption of share repurchases. Ratings could be downgraded if debt/EBITDA is sustained above 2.5x in a cyclically weak earnings environment. Debt funded share repurchases, or a significant deterioration in earnings could result in a ratings downgrade. A termination of the BHI acquisition requiring payment of the $3.5 billion fee to BHI could also lead to consideration of a downgrade. An upgrade of the combined entity, while unlikely in the near term, would be contingent upon achieving and maintaining debt/EBITDA below 2x, while generating improved and consistent operating results leading to competitive metrics relative to its peers.

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in December 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Halliburton Company, headquartered in Houston, Texas, is a leading provider of services and products in the energy industry related to the exploration, development and production of oil and natural gas. Baker Hughes Incorporated is also a leading provider of services and products in the energy industry related to the exploration, development and production of oil and natural gas, and is headquartered in Houston, Texas.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Andrew Brooks
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's reviews Halliburton for downgrade
No Related Data.
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