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Further oilfield services sector consolidation unlikely

The oilfield services sector has traditionally been a specialised and entrepreneurial world, but in the past decade a small number of large companies have come to dominate, buying up smaller firms and marketing themselves as one-stop shops for equally large clients (PE 12/09 p22).

Not everyone thinks that is the best formula. Doug Sheridan of EnergyPoint Research in the US, which tracks customer satisfaction with oilfield services companies, claims bundled contracts consistently underperform expectations.

However, his views have so far gone unheeded in the world of services procurement, where the likes of Schlumberger and Halliburton enjoy distinct advantages over their smaller rivals: sales teams with extensive contacts, regular opportunities to cross-sell products and services to existing clients and, because of their size, scale advantages and the ability to discount.

To national oil companies – in greater need of a broader array of technical services than international oil companies and possessing an increasing proportion of the world's most promising energy assets – Schlumberger and its nearest rivals also offer the simplicity and apparent "value-for-money" of a bundled contract.

Smith's decision to yield to Schlumberger's advances is a reflection of the difficulties medium-sized firms face when competing for business in an industry divided between the large companies and the ultra-specialised niche outfits. "Smith would have found itself in between [without this deal]," says Pierre Connor, an analyst at Capital One Southcorp.

The take over is only the latest and largest in a sequence of mergers and acquisitions activity that has seen the sector consolidate significantly in recent years. Smith itself merged with W-H Energy Services in a $3.2bn deal in 2008, and National Oilwell Varco merged with Grant Prideco in a $7.4bn merger in the same year.

In September, Baker Hughes, the third-largest services company behind Schlumberger and Halliburton, said it would acquire Houston-based BJ Services for $5.5bn. An important attraction for Baker Hughes was BJ's pressure-pumping equipment, as well as other services widely used in shale-gas projects and other unconventional gas formations.

Meanwhile, Weatherford, the fourth-largest player in the sector, has scaled back its US presence in recent years. "I question whether they contemplated what has now evolved in North American shale," says Bill Conroy, an analyst at Pritchard Capital in Houston.

This has led some industry observers to speculate about a tie-up between Weatherford and Halliburton. Halliburton, however, is already the largest provider of shale-rock pressure-pumping services. Having made a number of small-scale acquisitions in recent years, it is reckoned by analysts to have a meaningful presence in all of the most profitable areas of oilfield services and, within the US – where it still earns nearly half of its revenues – a healthy involvement in all of the best shale deposits: Haynesville in Texas/Louisiana (the most inaccessible and capital-intensive field, but also the biggest), Marcellus in Apallachia, Barnett in Texas and Fayetteville, Arkansas. Halliburton may even gain a competitive advantage as its newly merged rivals are distracted by the task of integrating their operations over the coming months.

Hefty premium

The high price paid for Smith has also put a hefty premium on future acquisition targets in the sector and may deter Halliburton from a buying spree, says Roger Read, an analyst at Natixis Bleichroeder in Houston. "If you're Halliburton and you look at the price paid by Schlumberger for Smith, you're not feeling any particular pressure to do something right now," he says.

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