Halliburton/Baker Hughes Merger - Implications for the Oil industry

In the past few days, the media has been awash with speculation over a possible merger between Halliburton and Baker Hughes with Baker Hughes CEO going as far as to make emails to Halliburton CEO public.

 Eventually a deal was made of approx. $35B and all members of both board of directors unanimously agreed to the sale. Lets not forget that of the entire sum, Halliburton can boast of $2B in cash with the rest to be financed by financial institutions and divesting some of their non core businesses. How does this affect the Oil & Gas industry?

First of all, both parties have issued statements that the merger will bring about consolidation and thereby increase efficiency, lets not forget that it puts them in a better position to compete with the largest Oilfield service company in the world..Schlumberger.

 Essentially the Big 4 (Schlumberger, Halliburton, Baker Hughes & Weatherford) in the Oil servicing industry is reduced to the Big 2 (Schlumberger & Halliburton or whatever the new entity will be named). Big 2 because there are grim times ahead for Weatherford and I am not sure Weatherford will be able to compete with these 2 behemoths in the coming years.

Weatherford is valued at $12B, compared to Schlumberger ($118B), Halliburton ($ 55B) and Baker (somewhere between $19B - $29B deending on which literature you believe) post merger Halliburton will be worth about $79B, a long way to go from Schlumberger but much closer than before. Synergies of this merger is expected to generate $2B annually which should be a significant source for fueling further growth.

Operating companies need to revisit existing procurement and category management strategies now as options for quality, robust and financially strong service providers in the in industry reduce, this implies that the control on the cost of oilfield services will weaken and more than ever effective vendor management strategies and category strategies will become more important to ensure that the Big 2 do not charge in excess of premium for services rendered.

Weatherford may need to go along with the trend and possibly start discussing a possible merger with other players in the industry or figure out plans to ensure competitiveness or growth to stay in the game.

This deal of course is not finalised until the US antitrust agency ratifies the merger though Halliburton advisers are confident of pushing the deal through.