Using our new North America Supply Chain Analysis Tool, we analyse how the deal may impact the wider industry
On 17 November, Baker Hughes Inc confirmed that it had reached an agreement with Halliburton to combine in a stock and cash transaction - a deal which we expect to have far-reaching implications.
The acquisition is the first large-scale consolidation since prices fell and brings together the second and third largest oil and gas service companies. The combined entity will have an initial enterprise value of US$89 billion which, whilst sizable, is still significantly smaller than market-leader Schlumberger which is valued at US$128 billion.
However, the enlarged business presents an opportunity for the company to position itself for long-term growth across multiple markets. In the key region of North America, Halliburton is already the leader in the massive pressure pumping market and absorbing Baker Hughes' operations will leave the company with a 40% share.
The deal will also provide Halliburton with an entry point into the growing artificial lift and chemicals segments where Baker Hughes is a leading player. On the drilling and completions side, the acquired downhole tools, bits and equipment could also expand Halliburton's offerings.
As a result, the new company would be able to offer a comprehensive suite of products which will prove very attractive to oil and gas clients who are looking to simplify their supply chain and procurement operations.
Furthermore, the deal presents the opportunity to leverage corporate synergies in areas such as real estate, corporate costs, personal reorganisation and operational improvements. This will result in cost savings that will help boost earnings and stabilise the company's financials during a price-driven downturn in upstream activity.
In terms of the wider industry, the biggest impact will be felt within the North America hydraulic fracturing sector. The company will be well-placed to offer highly competitive services to a wide client base, possibly pricing some smaller pumping players out of the market.
Large service companies such as Weatherford could benefit as they compete to become the new number three in the sector, although Schlumberger is likely to feel the force of Halliburton's new position in the North American and deepwater markets.
Whilst oil and gas companies are likely to be concerned that consolidation could lead to a reversal in the downward pressure they've been exerting on service costs, we believe it will lead to increased competition and lower prices for the oil companies.
Although it's not yet clear how the Federal Trade Commission and Department of Justice will view this merger, Halliburton is confident that it will gain the approval it needs to proceed.
Halliburton buys Baker Hughes [Subscription Required]
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Launching in January 2015, our North America Supply Chain Analysis Tool includes in-depth analysis of upstream spending across 14 key cost categories. It allows you to understand well costs and design for individual operators as well as benchmark performance to help improve your own economic efficiency.
As well as providing accurate short and long-term forecasts of equipment and service requirements, it offers the oilfield service sector a vital tool for identifying changing demand.
In the world's largest single upstream region by capex spend, it’s vital to rely on analysis that not only helps optimise the position you currently have but also identifies the opportunities on offer.
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