Stephens Says Baker Hughes' Deal Structure With Halliburton Provides Downside Protection, Long-Term Upside

In a report published Wednesday, Stephens analyst Matthew Marletta initiated coverage of Baker Hughes Incorporated (NYSE: BHI) with an Overweight rating and $76 price target given a degree of protection and insulation from a volatile marketplace.

Marletta said that the structure of the acquisition (Baker Hughes holders receive $19 in cash as well as 1.12 shares of Halliburton) provides Baker Hughes holders with downside protection if there were to be increasing volatility in energy markets. In fact, the analyst estimated if shares of Halliburton were to drop 25 percent, shares of Baker Hughes will retreat only 11 percent – providing a "safety net" that wouldn't exist if not for a pending acquisition.

Marletta added that his rating is linked to the company's acquisition by Halliburton Company (NYSE: HAL) and that the combined entity could eventually experience a period of margin and returns expansion given its scale and operational efficiencies. In fact, the combined entity could realize as much as $1 billion of R&D optimization as well as location consolidation while capital efficiency improvements are "inevitable."

Bottom line, Baker Hughes is an "innovation focused" company, a core competency that will mesh well with Halliburton's execution capabilities and establish a strong brand in a consolidated enterprise.