Depressed Oil and Gold Prices Force Halliburton, Osisko To Play Defense
Frank Holmes | Nov 26, 2014 05:03PM ET
A typical American Thanksgiving meal usually consists of gravy-drenched turkey, stuffing, a heaping mound of buttery mashed potatoes and a slice of pumpkin pie. After dinner, most people are incapable of doing anything other than sitting, digesting and watching the football game. All activity comes to a halt. In the time it takes for their stomachs to completely process the meal, the treadmill in the other room starts to grow cobwebs.
Something similar occurs when one company acquires another. Digestion of the acquired company often takes a while, during which time the buyer tends to experience a short-term slowdown. Its stock typically falls because, among other reasons, it must pay a premium for the acquisition.
In this month alone, two large acquisition announcements were made in the energy and mining sectors as Oil and Gold prices remain low. Oil field services giant Halliburton (NYSE:HAL) plans to buy rival Baker Hughes (NYSE:BHI) for $35 billion, pending an antitrust approval—the two are the second- and third-largest companies in the industry. Meanwhile, Montreal-based Osisko Gold (TO:OR) is set to take over Quebec City-based Virginia Mines for $424 million. The deals will give Halliburton a market capitalization of $70 billion; Osisko, $1.2 billion.
As expected, the buyers showed a slight dip following the announcements, while the companies being bought enjoyed a rally.
now unprofitable, including parts of the Eaglebine and Eagle Ford shale plays in Texas. In such a climate, Halliburton’s purchase of Baker Hughes could be described as a defensive move.
The same could be said for Osisko’s takeover, as gold prices still hover close to $1,200. The company already owns a royalty in the Canadian Malartic mine, Canada’s largest gold mine. Acquiring Virginia Mines means that it will also gain a substantial interest in Quebec’s Éléonore mine.
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Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.
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Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 9/30/2014: Apache Corp. 0.00%; Baker Hughes, Inc. 0.00%; Continental Resources, Inc. 0.00%; Goldman Sachs 0.00%; Goodrich Petroleum Corp. 0.00%; Halliburton Co. 2.19% in Global Resources Fund; Osisko Gold Royalties 0.00%; Pacific Rubiales Energy Corp. 1.16% in Global Resources Fund; Petrominerales, Ltd. 0.00%; SandRidge Energy, Inc. 0.00%; Schlumberger, Ltd. 0.00%; Virginia Mines, Inc. 7.13% in World Precious Minerals Fund.
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