NEW YORK: Talks that could lead to oilfield services provider Halliburton Co buying rival Baker Hughes Inc may herald increased deal-making in the energy business as companies bet on a protracted drop in oil prices, industry bankers said.
Competing service companies including National Oilwell Varco Inc and Weatherford International may also be targets, bankers and lawyers said. In any deal, the incentives will be the same: consolidation would allow them to better weather the downturn and resist pressure from oil producers to slash prices.
The Baker Hughes/Halliburton talks have stalled after the companies weren’t able to agree on issues including price, people familiar with the matter said.
As oil prices fall, oil field service companies get squeezed, one industry lawyer said. That’s because when prices fall far enough, it’s no longer economical to get oil out of the ground. If it’s too expensive to drill, there’s no need to pay an oilfield service company. “The services guys are the last marginal dollar,” the lawyer said.
While services companies are likely to feel the effect of lower oil prices sooner, overleveraged exploration and production companies may also be pushed to do deals over the medium term, bankers said. Such companies could include Apache Corp, Hess Corp, Marathon Oil Corp or Devon Energy Corp, bankers said. Those four exploration companies along with the oil services companies including Baker Hughes, all have market values that range between about $20bn and $31bn.
In the end, price expectations will decide whether upstream exploration and production companies turn into sellers. If sellers’ management believe the oil price will rebound fairly soon, sellers would wait until then, hurting chances for large deals.
Brent traded at $79.60 a barrel on Friday, down from $115.06 on June 19. Until prices stabilise, exploration and production company deals will likely remain asset-level deals in distressed situations such as Samson Resources’ sale of its Bakken assets.
“Certainly there will be instances where you will find more compromised balance sheet operators possibly being more inclined to sell their entire position,” said Ted Harper, a fund manager at Frost Investment Advisors LLC in Houston.
Not all will be targets, he said. Some exploration and production companies will seek to buy at a discount additional potential reserves near where they are already drilling “to enhance returns from existing production,” he said.
Reuters
