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Services giants hope for oil rally after merger fizzles

Halliburton and Baker Hughes emphasized cost-cutting and downplayed higher crude prices Tuesday as they pivoted from their just-killed merger and argued they are well positioned for an eventual industry recovery.

The two US oil services giants, addressing Wall Street analysts in separate presentations two days after calling off their proposed $28.6 billion merger, said recent higher oil prices after a long-running slide were a source of hope.

But that optimism has yet to translate into more orders from oil companies to purchase drilling fluids, or commission pumping services or other functions.

"Clearly they're marginally more optimistic about things," said Halliburton chief executive Dave Lesar. "I don't think we've seen that optimism translated into any set plans to actively increase the rigs in the back half of the year."

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Halliburton, which has already undertaken several rounds of layoffs, plans 2016 capital spending of $850 million, down 75 percent from the 2014 level.

Baker Hughes chief executive Martin Craighead said the drop in North American oil production had raised some hopes that oil markets "could move back into some kind of balance by the end of 2016."

But Baker Hughes plans $500 million in further expense cuts by the end of 2016 regardless of what happens with oil prices.

"We are going to be changing significant parts of our business in the coming weeks and months to ensure we have the most cost-effective and efficient organizational design," Craighead said.

James West, an oil services analyst at Evercore ISI, said there has been limited evidence higher oil prices will translate into more activity in the second half of 2016.

But "the seeds of the recovery are actively being sown, setting up for a momentous 2017 and beyond," he said.

That would be a relief to an industry hit hard as oil giants have slashed drilling budgets, mothballed rigs and cut staff.

- Lots of downgrades -

Fitch Ratings has downgraded just about every oil services company it covers, said Dino Kritikos, a director for the agency.

"Everybody has had some sort of negative outlook or downgrade over the last 12-18 months," he said.

In March, energy accounted for $275 billion in high-yield bonds, the biggest segment in the $1.5 trillion junk-bond composition. Of this group 8.3 percent were in default, Fitch said.

Halliburton and Baker Hughes announced their would-be tie-up in November 2014 as oil prices were in retreat due to several factors, including slowing demand in China and surging shale production in the US.

Halliburton and Baker Hughes, the number-two and number-three oil services companies, respectively, after Schlumberger, touted their union as a means to provide a full slate of services to petroleum clients worldwide.

But antitrust regulators balked at the deal, with the Justice Department saying in its lawsuit that the deal would have led to a virtual duopoly with Schlumberger in more than 20 markets.

Lesar said Tuesday that the Justice Department had misjudged a great deal for the industry and consumers.

"We continue to believe the proposed Baker Hughes transaction would have been pro-competitive," he said.

"However, obtaining US antitrust approval of large, complex business combinations, regardless of the industry, has become increasingly time-intensive and difficult, as evidenced by the termination and litigation of several other large proposed transactions over the last 16 months."