Baker Hughes deal a bet on natural gas (BHI; BJS)

Both stocks are up small fractions. From Loren Steffy at the Houston Chronicle:

Baker Hughes' $5.5 billion bid for BJ Services is a marriage made in recession.

The deal between the two Houston energy services companies is as much a bet on a rebound in natural gas prices as it is a strategic move for Baker Hughes to compete with Halliburton and Schlumberger. Natural gas prices have fallen 64 percent in the past year, closing Tuesday at $2.82 per million British thermal units.

Baker Hughes hopes to expand on BJ Services' expertise in drilling for shale gas, which has been one of the hottest exploration markets in recent years. Company executives predict the acquisition will add to earnings by 2011, based on the assumption of increased drilling activity that would result if prices rise to at least $6.50, said Ted Harper, a senior research analyst with Frost Investment Advisers in Houston.

“This is definitely a call that they think we are at or near the bottom,” he said.

Where, then, are all the other deals?

Recessions are supposed to drive consolidation, to prompt a culling of weaker companies by stronger ones. Yet in this downturn, energy industry deal-making has remained largely dormant.

“We are surprised that there wasn't more activity,” said Mark Roach, a senior vice president with the Houston-based Oil & Gas Asset Clearinghouse, a marketing and consulting firm for companies buying and selling oil and gas assets. “Everyone was in shock over the collapse of the equity markets as well as the impact on the commodity prices. People just froze and waited for some sort of stability.”

Natural gas uncertainty

Oil prices have doubled since February, but the market for natural gas remains fraught with uncertainty. Big finds of shale gas have resulted in a glut, which, combined with mounting competition from larger rivals Halliburton and Schlumberger, prompted the Baker Hughes-BJ Services deal. While Baker Hughes is hoping to capitalize on the recession, the lower prices may force many smaller companies into sales or mergers later this year or early next.

“There's a ticking clock,” Roach said.

Smaller exploration companies, for example, have been able to slow that clock down because of a cash overhang from the surge in commodity prices during the first half of last year and because many banks have been so embattled with other problems since last September that they were willing to be more lenient on financing. That's enabled troubled companies to delay refinancing or forestall mergers through joint ventures or other agreements....MORE