The EU Has a Point About the Halliburton/Baker Hughes Merger

As oil prices continued to tumble on Tuesday — hitting a new 12-year low after the Iranian government took advantage of the end of international sanctions to encourage its oil industry to open up the spigots and send another glut of crude onto the already thoroughly oil-saturated market — the Halliburton/Baker Hughes deal must have looked even more tantalizing than it did back in 2014 when shareholders first agreed to combine the two Houston-based oil field service companies.

However, the path to actually getting the two companies merged has been a thorny one. First the U.S. Department of Justice antitrust regulators showed themselves to be decidedly not enthused, and then European Union regulators proved to be even less inclined to sign off on the deal.

The EU regulators laid out their concerns pretty clearly about the proposed merger between Halliburton and Baker Hughes, as we noted last week. What's fascinating is that while the EU is worried about what the two companies combining could do to competition in the European market, there could be some big implications for Houston's oil field services industry, too, according to Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston's Bauer College of Business. In fact, Houston, with its long history tied to the ups and downs of the oil industry, is one of those cities that stand to be most directly affected by this deal. 

“There really are only four big oil field service companies. There are hundreds of smaller companies, but in terms of working across great big swathes of the industry those are the big four,” Gilmer says. “In a way those oil field service companies are really what makes Houston special. Yes, we have oil producers and national companies and all of that, but over the decades and decades, those oil service companies have been the technology leaders. If you were going to do anything sophisticated in the industry, you'd come to one of those four. And now if this merger goes through, there will only be three.”

Gilmer says these companies have been competing with each other and making innovations in various fields for years. The expertise of these big Texas oil field service companies is so well known that when the British opened up the North Sea for drilling in the 1970s, they tried to specifically import Texas oil field know-how so their own employees could learn from the best. “It turns out it can't be done, capturing that skill and ability that was created by circumstances here in Texas, by the American experience of coming up right here in this industry," he says.

So while the proposed $34.6 billion merger could be a problem for competition in the oil field services industry, it could also have some major implications for Houston's energy industry, since the oil field services industry is really what sets us apart from other energy industry-focused cities, Gilmer says. “If you're going to do drilling anywhere and it's even the least bit complicated, you go to these companies, and this is what really sets Houston apart. It's a big deal to see two of the big four actually merge.”

Since Halliburton and Baker Hughes have spent years being archrivals and competitors, they have overlapped in a lot of different areas in the industry, so one side or the other will have to get rid of certain units to maintain competition, Gilmer says. From there, there's always sizing down that comes with a merger. Both companies have already been through rounds of layoffs because of the oil bust, but company officials will go through again and look for redundancies, combining where they can, which almost always means a lot of jobs will be lost, given up to economies of scale. “However, given what's going on and how badly the oil field service companies are hurting right now, it's not even clear that the cuts would register as being related to the merger. Everyone is cutting. We've already seen 30,000 industry jobs lost across the industry in Houston alone, and that's just so far.” 

Meanwhile, the oil industry's situation just keeps getting worse. Gilmer thought the downturn might stop when oil hit $50 per barrel last year, but every time the prices began to rally, something – the Iranian nuclear deal, the Chinese economic slowdown or another release of Saudi oil – would happen to send the price tumbling down again. “The service companies are right in the middle of this because oil capital expenditures peaked at $300 billion and now they're down by at least $100 billion, and that's $100 billion that would have gone to them and now it won't.”

But it's not all gloom and doom. Ed Hirs, an energy economist at the University of Houston, says that all the shifting and changing in the oil field services industry will actually end up making room for new companies to spring up. "There will a number of startups coming out of this price downturn. This is where the new technology development comes in the cycle," Hirs says.

Gilmer also pointed out that this whole thing is a part of the endless cycle of the oil industry. Some people are still doing well, pulling in revenue from certain shale play wells that have continued to produce oil. “Those wells will keep producing for the next 20 years, and that's what's going to fund everything else in the industry in the coming years,” Gilmer says. Plus, the industry is always changing, moving from boom to bust and back again. “About the time we were all getting bored and people were saying that fracking was going to be the big thing forever, the wheel of fortune went down. The thing to keep in mind is that the wheel goes down but it always goes back up again.”

And meanwhile, it's really looking questionable as to whether the Halliburton/Baker Hughes merger will actually be allowed to go through. The two companies have a self-imposed deadline to close the deal by the end of April, but the EU won't likely issue its report until the end of May. And who knows when the Justice Department regulators will make up their minds. 

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