For an industry which is notoriously slow to action, Halliburton’s purchase of Baker Hughes – the largest ever deal in the history of the oil service industry - appears to have moved at an extraordinarily rapid pace.
Rumours only emerged last Thursday (although it appears negotiations had been going on since mid-October) amid claims that the deal would create a company with a combined market cap of around $75 billion.
If deals were still allowed to be done in smoke-filled rooms, it’s safe to say a few packs of Marlboros would have been got through over this past weekend ahead of the deal being announced on Monday. It's been confirmed that Halliburton would buy Baker Hughes for approximately $35 billion in cash and stocks. In terms of size, the newco will still be below Schlumberger’s market capitalisation of $124 billion, but it’s been reported that, like-for-like, HalliBaker (a name that might stick, whether both parties like it or not) would have had revenue of almost $52 billion last year, approximately $6 billion higher than Schlumberger’s.
Of course, the agreement will face strict anti-trust scrutiny, but it is unlikely that red tape will derail its ultimate completion.
The drop in oil price, which dipped to $79 a barrel for Brent crude on Monday, and the resultant fall in company valuations, is regarded as the catalyst for this deal. And it may well be that, as prices are predicted to slip further, other companies may look to consolidate in an effort to reduce costs and overheads.
Nearer to home and on a similar theme, a survey by Fifth Ring of a number of leading oil industry figures asked the question: are companies willing to collaborate more in order to ensure recovery rates for the world’s remaining reserves are maximised? The results, just published, revealed that 88% of respondents thought they were. Under the current financial climate, at what per barrel price will that willingness to collaborate turn into thoughts of merger, or acquisition?
All of this makes next Thursday’s meeting of OPEC in Vienna absolutely critical to the future shape of the global oil industry. I believe a refusal to reduce production will surely only maintain bear market conditions, further impact on oil price and thereby enhance the growing culture of collaboration, in whatever form that takes. Whatever OPEC decides to do on November 27 will have ramifications for all of us.