How do the changes in oilfield service landscape affect procurement?
During the past weeks, 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.
A deal of approx. $35B was made and all members of both boards of directors unanimously agreed to the sale. Lets not forget that of the entire sum, Halliburton can boast off with $2B in cash with the rest to be financed by financial institutions and divesting some of their non core businesses. How will this affect the Oil & Gas industry?
First of all, both parties have issued statements that the merger will bring consolidation and thereby increase efficiency, let’s not forget that it puts them in a better position to compete with the largest Oilfield service company in the world: Schlumberger.
Eventually 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 depending 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 are expected to generate $2B annually which should be a significant source for fueling further growth.
Now, Operating/Producing companies need to revisit existing procurement and category management strategies 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, are effective vendor management strategies and category strategies highly important, in order to ensure that the Big 2 will not charge the oil producing companies in excess of premium for services rendered.
Both parties have cited increased competition, efficiency, consolidation and economies of scale as primary reasons behind the merger but we need to ask the question: “Will this merger actually benefit their clients?”
As I mentioned above, control on cost of oilfield services will weaken and oil producing companies will struggle to obtain reasonable costs for services.
In terms of competition, Weatherford being the only viable candidate to truly compete with the 2 mega companies, might need to go along with the trend and perhaps 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 finalized until the US antitrust agency ratifies the merger though Halliburton advisers are confident of pushing the deal through. If this deal eventually goes through there will be some sort of shift in the power dynamics of the relationship between the services industry and production sector to the advantage of the oil service companies.
Oil&Gas Procurement Lead