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Questions surround oilfield services M&A activity

Difficult trading conditions bring uncertainty to M&A activity in a tense oilfield services sector

Two major mergers, that bringing Halliburton together with Baker Hughes and Schlumberger with Cameron International, both made sense when they were launched. They involved big companies getting together to save costs and beef up their offerings at a time when demand was plummeting and prices slumping. But now one of these tie-ups looks a distinctly better move than the other.

Whereas global market leader Schlumberger’s acquisition of Cameron seems all but done – the companies hope to complete it in the first quarter of this year – Halliburton and Baker Hughes, the world’s second and third largest oilfield services firms, are still struggling to persuade takeover authorities in key markets that their merger won’t be bad for competition. Financial markets are uncertain that the deal will actually go through. Others question whether it still makes strategic sense.

While both mergers take advantage of the decline in asset prices following the oil market slump, the logic underpinning each is different. The acquisition of Cameron, worth just short of $15bn when the proposed deal went public in August 2015, broadens the range of services that Schlumberger can offer. It adds Cameron’s surface, drilling, processing and flow control technologies to Schlumberger’s reservoir and well technologies, providing what Schlumberger calls “pore-to-pipeline” services.

Buying Baker Hughes will give Halliburton a stronger portfolio in weaker areas like directional drilling and production chemicals. It should also let it expand its geographical reach, for example through Baker Hughes’s higher-profile presence in regions like Canada and Russia. The $35bn merger also creates a much bigger company with more market clout, even if it will remain smaller than Schlumberger. Nonetheless, there’s lots of overlap between the Halliburton and Baker Hughes product portfolios – in areas such as pressure pumping, cementing and completions. This might give the merged entity a dominant position in some areas of the market.

Regulatory hurdles

So, while the combination of Schlumberger and Cameron provided few headaches for regulators – in the US, the deal received US Department of Justice clearance without any conditions in November – the Halliburton merger is a different story.

Launched nine months before Schlumberger’s deal, the Halliburton-Baker Hughes merger proposal has yet to satisfy regulators, despite multi-billion dollar strategic sales of some businesses by both companies; all part of a campaign to persuade regulators that the merged company’s presence in some segments won’t be too dominant.

The authorities in the US haven’t been too impressed with these efforts. Nor have those in in key markets like the EU, Australia and Brazil. In December, the companies extended the deadline for completion of their merger until April 2016, giving it time to address US justice department concerns about the deal’s structure. In January, the EU launched a detailed probe into the merger, which will delay its decision on the deal until May – a month after the marriage vows were supposed to have been signed.

Further asset sales may be necessary to get the deal over the line. One problem for regulators is how to assess the sale of a strategic unit to a smaller rival. That is, if Halliburton-Baker Hughes sells an asset, the buyer – even with that new asset – isn’t going to have the same market presence as Halliburton-Baker Hughes. It’s unclear whether or not a divestment would actually help competition.

The poor trading conditions – which have created a lot of slack and spare capacity in the oil-services sector – are likely to last for a while. This might bring some leniency from authorities, which will know that even big providers with a dominant position will struggle to increase prices.

On the other hand, the travails of Weatherford International might give regulators pause. The third-largest oilfield services firm has been struggling to keep its debt under control, triggering a slide in its share price. That’s raised doubts that the company could provide the necessary competition to a merged Halliburton/Baker Hughes, especially in market segments like land drilling.

For Halliburton, the cost of a failed merger would be high: it must pay Baker Hughes around $3.5bn in compensation if the deal is called off. Such a loss would weaken Halliburton’s balance sheet, hurting its ability to invest in assets elsewhere.

By contrast, Schlumberger’s merger with Cameron looks like a sounder deal on paper, representing better value for money for Schlumberger’s shareholders. This is true not just because of the good fit between the firms, but also because the terms were finalised after the market had gone through most of its fall.

Halliburton’s bid was launched when oil was trading at around $79/b, Schlumberger made its move in mid-2015, when Brent was trading at just above $41/b and services-sector equity values had also slumped. Schlumberger paid a similar share-price premium to that offered by Halliburton, but got a much better deal.

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