November 18, 2014 / 11:51 PM / 5 years ago

Analysis: Oil price rout to curb U.S. drilling costs even with mega merger

NEW YORK (Reuters) - Low oil prices that threaten producers’ profits may be a boon in one way, as they force service companies to keep prices low for the drill bits, cement and piping for oil extraction, even if two of the largest providers of such products merge.

Halliburton Co, said on Monday it will buy Baker Hughes Inc, in a $35 billion deal that would create an oilfield services company to take on global oil services leader Schlumberger NV.

Some experts have raised concerns that the deal, which would merge the world’s second- and third-largest service companies, will reduce competition and potentially raise the price of materials vital for drilling.

The United States is home to half of Baker Hughes’ and Halliburton’s existing operations, according to company filings. Together they would dominate some key and costly parts of the oil production supply chain, overtaking Schlumberger in areas including well cementing and hydraulic fracturing.

But a 30 percent dip in oil prices since June, fueled by record high supply, may prevent the new company from raising prices in U.S. shale formations, giving breathing room for oil companies considering cost-cutting next year.

“Market pricing will be set by the supply and demand of frack pumps in the U.S., and there’s going to be excess next year and possibly into 2016,” said Michael Lamotte, an analyst at Guggeheim Securities. “I don’t think that their coming together is going to create issues of pricing power.”

The deal is far from closed and it is anyone’s guess where oil prices will be when the two companies actually begin to operate as one. But the day the deal was announced, executives were eager to quell concerns about competition.

The deal “is an offering for our customers that can help drive their cost (per barrel) down,” Halliburton Chief Executive David Lesar said on a conference call to discuss the merger this week. “If we can demonstrate a way to lower their costs, then they’re going to love this deal, and I think we can do that.”

The joint Halliburton-Baker Hughes would hold 51 percent of the global market for well cementing, which occurs once a well has been drilled, and 39 percent of shale fields, according to data from Spears and Associates and Cowen and Co.

This consolidates two of the costliest parts of the oil production process, experts said. Drilling and fracking take up most of the costs, but casing and cementing a well after drilling are also major expenses.

The cost of drilling oil wells rocketed in the middle of last decade as companies sought to crack difficult prospects with new technologies such as fracking and horizontal drilling.

And while some wells still cost up to $10 million to drill in areas such as North Dakota, many fracking costs have plateaued or fallen since 2010 as companies find more streamlined ways to tap shale rock formations. Wells in the Eagle Ford can be drilled for $4.5 million to $9 million.

A combined Halliburton and Baker Hughes would also face pricing pressures because of competition from smaller rivals with strong regional footholds such as CalFrac Services, Weatherford, and Fortis Energy Services, said Richard Spears, vice president of consultancy Spears and Associates.

“Even though for the nation as a whole, Halliburton plus Baker would have a significant market share, the frack industry is like the real estate industry: It’s location, location, location,” said Spears. “That’s why you could put the two together and you would not see a material increase in pricing.”

Reporting by Jessica Resnick-Ault

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