Halliburton's planned $35 billion deal to acquire oilfield services’ rival Baker Hughesis raising eyeballs and speculation worldwide. To say that the merger is a result of lower oil prices is oversimplification. Something along these lines has been in the works for years in an openly acquisitive marketplace. It’s the size and implications of the merger that is turning heads.
In a larger sense, the merger reflects the changing landscape of the oil and gas services and supply industry. Always dominated by a “big three” generally made up of Schlumberger, Halliburton and Baker Hughes, the landscape traditionally included an additional layer of small- to medium-size, more specialized providers. Of late, those smaller players have been acquired nearly as fast as they have sprung up. Coupled with their demise has been the rise of a major contender for a spot in the top three — GE Oil & Gas. In some senses, Baker Hughes’ biggest rival is not Halliburton or Schlumberger, but GE, whose growth and across-the-technology-board acquisition policy has challenged the big three in almost every market segment.
It was into this reorganizing world that the shale boom erupted. Overnight, the scene changed. The big three and others geared up, ordering new equipment, opening new facilities, hiring loads of new staff and, as they always do, throwing fate to the wind. Until the price of oil started to sharply drop, it all worked well — mostly. But behind the scenes, major growth and capital investment in equipment overtook caution and business acumen. In the largest sense, the oil price drop did not stab the service and supply industry — it stabbed itself, as it always does, amidst a changing, chaotic landscape. And its customers, as always, were cheering from the sidelines.
The merger is not a foregone conclusion. A number of factors argue against it. First is the regulatory role of the Federal Trade Commission (FTC), designed to allow government to control tendencies toward monopolies. While it appears as though the combined market share of Halliburton and Baker Hughes would qualify for government oversight under the FTC regulations, the government traditionally has been reluctant to act. There is little reason to think that will change in this instance. Still the merger could face resistance from the FTC because it would make the industry highly concentrated. It would be left with two large companies: the merged Halliburton and Schlumberger. It’s the kind of merger, with just two large companies left, that is “going to be tough to get through anywhere,” Steven Cernak of the law firm Schiff Hardin told The Wall Street Journal.
Perhaps more of a threat to the merger is the customers, particularly the large multinational integrated and independent oil and gas companies, who were willing participants in pushing the service and supply industry off the cliff. These bodies have long made it known that they prefer — or more accurately demand — generally no less than three viable vendors for any energy service or supply. That won’t change, although the extent to which it might impact the early days of the merger is unknown.
What is known is that the big three made up of Schlumberger, Halliburton and GE Oil & Gas, will remain. But GE does not play by the same playbook as the other two. That, coupled with continued lower oil prices, might make for a different sort of game with GE holding a very good hand.
