In an effort to minimize the impact of declining oil prices, the world’s second largest oilfield services company Halliburton is in preliminary talks with Baker Hughes Inc. discussing a possible merger.
Yesterday, Baker Hughes released a statement saying the company is in “preliminary discussions” with Halliburton regarding a “potential business combination.” However, the statement also specified that “these discussions may or may not lead to any transaction,” and, “Baker Hughes does not intend to comment further on market speculation or disclose any developments unless and until it otherwise deems further disclosure is appropriate or required.”
A report by the Financial Post, though, quoted an anonymous source familiar with the deal as saying that “if negotiations are successful, a deal could be announced as soon as next week.”
The acquisition of Baker Hughes by Halliburton would help protect both the companies from a market decline that has witnessed a drop in oil prices by one-third since June of this year. The declining market has spawned a plethora of mergers, acquisitions and consolidations of energy services companies across the nation.
On Thursday, U.S. benchmark crude dipped below $75 per barrel. Analysts have suspected that the dropping prices could spur a flurry of smaller deals involving specialized service companies, but the possible incorporation of the two largest domestic oilfield services companies has come as a surprise. Prior to the possibility of the merger being announced by Dow Jones, share prices of Baker Hughes and Halliburton had dropped more than 30 percent since July.
Bloomberg reported that the companies have been discussing the possibility of a merger for several months, ever since oil prices began to crumble. The deal could be a result of the declining market, but David Lesar, Halliburton’s CEO, recently told Bloomberg that he thinks prices will begin to stabilize and climb sometime next year. This indicates that Halliburton is capitalizing on the market’s short-term volatility to reinforce its stance against Schlumberger, the world’s largest oilfield services company.
The combined company, though, would still only be half the size of Schlumberger. The potential merger would make a drilling, logistics and services behemoth with a sum of publicly traded shares worth $67 billion, and would employ roughly 140,000 people. For comparison, industry leader Schlumberger currently has a market capitalization, or total value of publicly traded stocks, worth $125 billion, and employs about 123,000 people.
According to a report by Reuters, the trading of Baker Hughes stock shares was frozen on the New York Stock Exchange for a short time due to potential volatility. When trading of the shares was later reopened, the price per share jumped up 15 percent. On Thursday at 3:25 p.m., shares of Baker Hughes stock was priced at $48.68. No more than 25 minutes later, the price jumped to $61.22. Today at closing, shares were priced at $59.89. Before the market closed, shares of Halliburton stock had risen 1.1 percent.
The announcement had a resonating effect on share prices of other oilfield services as well. Share prices of other service companies such as Ensco, Nabors Industries, and Weatherford International climbed by the end of trading, some seeing share prices increase by six percent.
The merger of the two energy giants, however, will likely have to jump through a considerable amount of hoops to avoid anti-trust laws. Staff member for the U.S. Department of Justice’s anti-trust division, Seth Bloom, told Reuters, “The question with mergers like this is there are divestitures of submarkets that can solve the problem.” If the deal is finalized, he continued, the companies would likely have to sell off some assets to assure regulators that the deal wouldn’t be harmful to its competition. To avoid anti-trust laws, the combined companies may be required to sell off up to 20 percent of its assets.
The merger of the two companies will create an overlap of a variety of services and technologies such as cementing and casing work, lift systems and drill bits. The speculated deal will also likely attract scrutiny from overseas regulators in Europe, Mexico, Brazil and China, where relatively few oilfield services companies exist.
Even with the merger, though, the combined company would be in control of roughly only 30 percent of the U.S. onshore market, which remains mostly fragmented. This leaves plenty of space for other oilfield services companies to follow suit and broker deals that would protect themselves from declining prices.
In an interview with the Financial Post, Richard Spears, Vice President of industry consultant firm Spears & Associates, said, “These oilfield services companies need to have a global footprint of a complete portfolio of products and services … Schlumberger has it; a Halliburton-Baker Hughes combination would mimic the Schlumberger footprint.” The merger would fill in the disparity between the two companies’ services, combining Halliburton’s technology to increase production in older wells with Baker Hughes’ state of the art oil tools.