The lure of the one-stop oil-exploration services shop
Consolidation in the oilfield services sector is seeing a new breed of organisation developing – the one-stop-shop for all an exploration company's upstream needs, writes Ian Lewis
BAKER HUGHES' acquisition of BJ Services (BJS) reflects the importance accorded to critical mass and the one-stop-shop model in the oilfield services sector. But while smaller companies may be snapped up in coming months by the industry's main players, there is unlikely to be significant consolidation among the larger players.
Schlumberger and Halliburton already offer a broad range of services; Weatherford International is not far behind. With big clients, such as national oil companies (NOCs), increasingly looking to award turnkey contracts to single companies, the likes of Baker Hughes are following suit.
The Baker Hughes/BJS, deal, worth around $5bn, created a company with a market capitalisation of some $16bn, firmly establishing Baker Hughes as the world's third-largest oilfield services company, behind Schlumberger and Halliburton. It pools Baker Hughes' reservoir-consulting, drilling, formation-evaluation, completion and production products with BJS' pressure-pumping, well-completion, production-enhancement and pipeline services.
Agreed in August, the alliance shows how priorities have shifted in the sector, as it reunites Baker Hughes with a company it spun off in 1990. It also represents something of a gamble for Baker Hughes, given the depressed state of the North American drilling market, where BJS is an important player in pressure pumping. However, it should pay off in the long run.
"Baker Hughes had a large void in the services it offered with the absence of pressure pumping. The timing was right, as share prices were depressed and they bought BJS near the bottom of the cycle," says Mark Urness, head of energy research at Calyon Securities (USA), an investment bank. "But they are trying to integrate and grow the business from a fairly depressed level with a lot of over capacity, so it will be challenging for the first couple of quarters."
The need to offer a one-stop-shop option was illustrated by Saudi Aramco's decision to make the latest award on the world's largest oilfield, South Ghawar, as an integrated, turnkey contract – the first time the country has done this. Most of the big oilfield services companies put in bids, but Halliburton was announced as the winner in November.
The five-year contract, with an option to extend, covers the provision of drilling rigs, directional and horizontal drilling, logging while drilling, cementing, mud engineering, wireline logging, completion, perforating and other well-construction activities, as well as engineering and management of drilling operations. Using three or four rigs, the project requires the drilling of up to 185 oil-production, water-injection and evaluation wells. Halliburton has not revealed the value of the deal, although analysts suggest a price of around $0.5bn.
Reduced complication, lower costs
Such turnkey contracts not only simplify relationships with contractors for NOCs, but cut costs – which could encourage greater packaging of services in the US and Canada. "In North America it is less prevalent, but it's moving in that direction. When services are packaged in that region, it is more for a price discount rather than for the synergies," says Mark Brown, a senior research analyst at Pritchard Capital Partners.
Several of the biggest oilfield service companies are building war chests to make possible acquisitions. But a wave of mergers is unlikely to sweep the market just yet.
With the worst of the economic downturn seemingly in the past, smaller firms are less likely to be forced into distress sales of their assets than they might have been six months ago. And while there are several small and medium-sized services companies operating in North America that could benefit from consolidation, buyers are not prepared to pay the price potential targets are placing on themselves, Brown says.
In the short term, the sector leaders are more likely to focus on organic growth through building their non-North American operations and exploiting new contract opportunities, rather than buying smaller rivals.
It is also easy to forget, amid all the competitive talk, that oilfield services firms must also be collaborators, not just on the oilfield, but also in developing new technology, where pooling expertise, finance and marketing strength brings benefits for both sides.
A good example is the new Intelliserv joint venture between National Oilwell Varco (NOV) and Schlumberger to provide high-speed, drill-string telemetry systems. NOV, which pioneered the technology and has a 55% stake, will provide manufacturing, technical and operational support, while Schlumberger (45%) will add its evaluation and measurement expertise.
The technology uses a high-speed broadband network to transmit data to and from the bottom of oil and gas wells as they are being drilled at a speed 20,000 times faster than conventional mud-pulse technology. The opportunities for NOV to access Schlumberger's global marketplace, covering more than 80 countries, would have been an important factor in sealing the deal.