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Industry Analysis: Falling oil prices encourage collaboration between technology providers

14th November 2014

Falling prices and falling profits are often the harbinger of market consolidation – and there can be no more fertile breeding ground for such consolidation than the oil and gas industry with prices tumbling and profits under increasing pressure

Industry Analysis: Falling oil prices encourages collaboration between technology providers
There has been a clear trend over the past decade to become more of a ‘one-stop shop’

So it came as no great surprise when news broke yesterday that the number two and three US oilfield services majors, Halliburton and Baker Hughes (BHI), are in merger discussions. However, while pressure may increase given the falling oil price, there seem few obvious combinations that would not fall foul of anti-trust, financial or cultural barriers.

Just before US market closed, news broke that Halliburton, the second largest US OFS major, was in talks to buy the number three player, Baker Hughes.

BHI has since confirmed this officially.

“Media speculation suggests a deal could be announced as early as next week, but is short on detail, such as cash versus paper, size of premium etc.,” says Neill Morton, an analyst at Investec. On the back of this report BHI’s share price rose 15 per cent in the final 30 minutes of trading in the US last night.

Given the collapsing oil price, a merger could be seen as defensive, protecting market shares and with synergies to lower the combined cost base. However, there has also been a clear trend over the past decade to become more of a ‘one-stop shop’, expanding geographically and broadening the service offering.

The deal would also close the market value gap with Schlumberger, the number one player. “Current market values are SLB USD 122bn, HAL USD 46bn and BHI USD 25bn,” added Morton.

“Geographically, the pro-forma share of revenues and profits would not alter very much. However, in absolute terms, HAL/BHI would challenge SLB outside the US, where SLB is the dominant player.”

But more intriguingly BHI brings technological leadership in enhanced oil recovery and drilling tools to the table.

But according to Morton anti-trust issues are likely to be a severe sticking point for any potential deal. “These look likely to be extensive, particularly in the US,” he says. “It has been suggested in the media that HAL may try to pre-empt this by creating a unit of assets for disposal. Areas of concern may include hydraulic fracturing, wireline logging, completion services, cementing services and drill bits.”

But what does this mean for European consolidation?

“The US OFS majors focus more on ‘downhole’ activities, while the European OFS sector is more ‘above the mudline’,” Morton concludes.

“Cross-border consolidation in Europe seems less obvious, in our view. Heavily underperforming sub-sectors such as drilling and seismic are suffering from overcapacity. But acquiring a competitor in order to cut capacity does not seem a logical move. There may also be anti-trust issues giving dominant market shares in seismic. This may also apply to the big three players in subsea installation, Technip, Saipem and Subsea-7.”

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