If a merger between Halliburton Co. and Baker Hughes Inc. were to come to fruition, with preliminary discussions confirmed, the combination could create an oilfield services (OFS) behemoth, which in the North American onshore would translate into a drilling and completion (D&C) beast.
The Houston-based providers have confirmed they are in preliminary discussions.
“These discussions may not lead to any transaction,” Baker, the No. 3 OFS operator in the world stated. Halliburton (HAL), No. 2 provider, has been talking with Baker for months, well ahead of the recent fall in crude oil prices, sources told NGI‘s Shale Daily on Friday.
A merger could create an OFS firm with a $70 billion-plus market cap; Schlumberger Ltd. (SLB) still would hold its No. 1 spot with an estimated $122 billion market cap.
“A combination would create the dominant pressure pumping firm in North America, with a combined market share of roughly 40% of the market,” Morningstar analyst Robert Bellinski said Friday. “The biggest obstacle for pressure pumpers has been the oversupply conditions that have led to persistently unfavorable pricing conditions. If a combined entity high-graded assets and removed some of the supply out of the market, we think profitability and returns could ascend quickly…”
SLB holds around 10% of the pressure pumping market, with Weatherford International holding around 5% of the international business “and any individual company’s market share drops off considerably from there,” said Bellinski.
In the United States, the No. 4 pressure pumping provider is FTS International, which has more than 1.6 million hydraulic hp (HHP) deployed across an estimated 34 pressure pumping fleets in the U.S. onshore. Patterson-UTI Energy has more than 1 million HHP.
HAL is the “clear leader” among North America’s unconventional OFS providers, “the 800-pound gorilla” because of its dominance in pressure pumping, i.e. drilling and completions, said Bellinski. HAL now holds an estimated 28% share of the North American pressure pumping business, with Baker in second place at 26%, while SLB has a 14% share.
For hydraulic fracturing techniques, where water, chemicals and proppant are blasted into wells, HAL’s market share is 26% in North America, while Baker has 13% of the market. SLB holds around 20%. In the North American cementing/pumping business lines, HAL has an estimated 35% of the market, Baker provides 16%, while SLB has 27%.
A Baker merger also would give HAL a big technology advantage. Baker conducts much of the same types of research and offers similar suites of services, thereby improving efficiencies and cutting down the competition.
SLB’s “distinct advantage” is global scale, leading to higher margins on more cost absorption and better efficiencies, said UBS analyst Mike Urban. However, creating synergies between companies of that size could take two years or more because they are “very different and it would take time to become a unified company.” If it comes to pass, the combination would “create a company with over $55 billion in revenue, more than $70 billion in equity market cap and $80 billion in enterprise value,” based on Thursday’s stock prices.
No OFS merger and acquisition (M&A) transactions have approached the level of a potential Baker/HAL merger. SLB four years ago combined in an $11 billion merger with Smith International Inc. (see Daily GPI, Feb. 23, 2010). Baker in 2010 completed a $5.5 billion merger with BJ Services Co. (see Daily GPI, Sept. 1, 2009). Last year General Electric spent $3.3 billion to buy artificial lift specialist Lufkin Industries Inc. (see Daily GPI, April 9, 2013).
The North American market remains fragmented, with dozens of OFS operators providing one or more services to exploration and production companies. The Big Three often tout their expertise in providing full service amenities, giving them a distinct advantage in particular with deep-pocketed explorers able to buy package services over a contracted period.
Predicting the outcome of a completed merger is difficult, according to Tudor, Pickering, Holt & Co. (TPH). Jeff Tillery and Byron Pope in a note to clients Friday said mega-deals don’t happen on a “convenient” timeline, and they pointed out that it took five years for SLB to come to terms with Smith. SLB-Smith merger documents indicated that the companies actually began talks in 2005. It’s too soon to do more than back-of-the envelope estimates on a tie-up, said the TPH duo.
“Working in absence of any deal terms makes it hard to have a view as to whether a deal makes purely quantitative sense,” wrote Tillery and Pope. “A premium would obviously be involved, but it’s easy to turn the math into accretive depending on premium magnitude, whether a cash component is involved (both companies are lightly levered today), cost savings magnitude (huge overlap between the business)…”
There is a strategic rationale, including more international tenders, complementary projects, a global scale to rival SLB, but there are risks. In addition to anti-trust concerns, there’s also “execution from combining long-term fierce competitors,” said the TPH analysts.
Anti-trust issues also could be overcome, according to analysts. OFS M&A by rig equipment providers, production chemical providers and others “resulted in high apparent market shares, yet were able to be completed,” wrote Tillery and Pope. Still, it’s “an enormous question in how realistic and successful a…combination could be.” If there were too many required divestitures among their joint product services lines (PSL), it could water down the effectiveness of a potential merger.
North American pressure pumping activity could be the largest hurdle, “but we actually don’t think this should cause an anti-trust problem” among their PSLs. After “watching this business in recent years could compellingly argue that there would not still be competitive pressures in the business.”
The impact on Houston is a question, with sources telling NGI‘s Shale Daily that workforce reductions likely would be a given. Baker employs a global workforce of around 61,000, with about half of its revenues from North America. HAL employs more than 80,000 people worldwide. There were no estimates available on how many each employ in the Houston area, where they not only are headquartered but where the major research and development activities are underway.
On Monday, HAL executives are scheduled to provide investors in New York City with an update of operations and a view of 2015.
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