Halliburton, Baker Hughes abandon merger

05 May 2016, Week 17, Issue 402

Two of the world’s largest oilfield services companies, Halliburton and Baker Hughes, abandoned their proposed merger on May 1, amid pressure from both US and European anti-trust regulators. The deal, first announced in November 2014, was initially valued at US$35 billion and sought to merge the two Houston-based firms and offer greater profitability from economies of scale.

The CEOs of both companies called the failure to complete the merger disappointing. “The challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action,” Halliburton’s CEO, Dave Lesar, said in a May 1 press release. 

Baker Hughes’ CEO, Martin Craighead, said the planned merger had been an extremely complex global transaction. “Ultimately, a solution could not be found to satisfy the anti-trust concerns of regulators, both in the United States and abroad,” he said. In connection with the scrapping of the merger agreement, Halliburton will pay Baker Hughes a termination fee of US$3.5 billion. 

The proposed merger was criticised from its inception over fears that it would stifle competition. On April 6, the US Department of Justice (DoJ) filed a lawsuit to block the deal, saying it would eliminate competition and leave just two dominant firms in the industry – the newly merged company and Schlumberger, which is the world’s largest oilfield services firm.

US Attorney General Loretta Lynch welcomed the decision to cancel the deal. “The companies’ decision to abandon this transaction – which would have left many oilfield service markets in the hands of a duopoly – is a victory for the US economy and for all Americans,” she said.

Deputy Assistant Attorney General David Gelfand with the DoJ’s Anti-trust Division said the merger would have “raised prices, decreased output and lessened innovation in at least 23 oilfield products and services critical to the nation’s energy supply”.

The deal was announced when oil prices were around US$75 per barrel. But since the announcement, oil prices have sunk even further, briefly falling into the US$20s range earlier this year – a 12-year low – before rebounding to around US$45 per barrel currently. As a result, the value of the deal had declined to around US$28 billion by the time it was scrapped.

Both Halliburton and Baker Hughes have seen major losses. Halliburton reported a first-quarter loss of US$2.4 billion this year compared with a loss of US$641 million from the same period of 2015. The company also cut another 6,000 jobs in the first three months of 2016. 

For its part, Baker Hughes reported a US$981 million loss in the first quarter, compared with a US$589 million loss in the same period of 2015. The company’s first-quarter revenue fell 42% year on year. Since both companies are struggling as the low oil price environment continues, they can expect to face further challenges now that the merger is no longer an issue.

Indeed, Bloomberg reported last week that both companies, as well as Schlumberger, were considering pulling back from parts of the North American market as their losses continue to mount. Schlumberger has posted its first North American operating loss since at least 2000.

Meanwhile, Halliburton has said it would consider other acquisitions as it seeks to bolster its position in the wake of the failure of the merger.

The situation could yet worsen. Current prices have in part been supported by speculation over a pending agreement among major producers, including Russia and Saudi Arabia, to freeze output. However, talks over a production freeze collapsed in Doha last month, and in the US some oil companies have said in their first-quarter results that they are ready to carry out new drilling work. These trends have led to concerns that oil prices could start trending downward again, hitting producers and services providers alike even harder.

 

Edited by

Anna Kachkova

Editor

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