Illustration Blair Kelly
Halliburton was already the world’s second-largest provider of oilfield services at the time, but apparently that wasn’t nearly large enough. On November 17, 2014, Halliburton announced that it was buying the third-largest company in the space, Baker Hughes, in a cash-and-stock deal worth US$34.6 billion. The potential anti-trust concerns were obvious enough at the time to Halliburton that it pledged to sell businesses generating an estimated $7.5 billion in revenue in an effort to win regulatory approval. But in July it announced that it had agreed to extend the date of the U.S. Department of Justice’s review of the deal and that it would unload still more assets. According to Reuters, the deal is expected to close, if it meets the DOJ’s satisfaction, by December 1. If it doesn’t, Baker Hughes is entitled to a $3.5-billion breakup fee. Schlumberger, the resident Goliath in the oilfield services sector, wasn’t about to wait around and see how that review turned out. On August 18, it announced that it was buying Cameron International in a cash-and-stock deal of its own worth US$14.8 billion. And unlike the Halliburton-Baker Hughes tie-up, there were no regulatory concerns to cast doubt on the deal’s odds of being consummated.
This might seem like more bad news for the Canadian oilfield services sector, which has already had to contend with more than its fair share of it lately. But Mark Salkeld, the president and CEO of the Petroleum Services Association of Canada, isn’t so sure about that. “It’s not entirely a bad thing. Halliburton is going to be divesting itself of some of its service lines where Baker and Halliburton had similar services. They’ll be getting rid of equipment, and there will be opportunities for other entrepreneurs in that same line to pick it up.” Scott Treadwell, the director of oilfield services equity research at TD Securities, sees it the same way. “If those big guys really cared about Canada it would be tough, because you’re getting a bigger company with a bigger toolbox and a bigger balance sheet. But I think what you’ll find is that you’ll have two guys who almost look at it and say, ‘We have too much in Canada.’ They have this optimum size for a Canadian operation, [and] both of them had roughly that size. Just because you’ve doubled the size of the company doesn’t mean you double the Canadian presence.”
Indeed, Treadwell says, the mergers could actually create opportunities for Canadian companies to grow their market share internationally. “Whether it’s Argentina or Mexico or Colombia, and maybe for some guys it’s the [United] States, there are all these markets around the world where companies have this toehold. And as the industry at the big end of size consolidates, you have to think that some of those market positions are going to get more tenuous. But at the same time, customers – at least in North America, and a lot of other places where it’s not run by an NOC – tend to like variety. They just don’t like to pay for it.” Somewhat ironically, perhaps, it’s the smallest players who stand to benefit the most from the big getting bigger. “If you’re a big fish in some of those ponds, I think that’s going to be tough,” Treadwell says. “But if you’re less than 20 per cent of the market in one of those countries, I don’t think it’s going to be, on the face of it, a bad thing – and it may provide some opportunities. It’ll be product line-specific, but there may be some opportunities there.”
At home, meanwhile, the sheer size of Schlumberger and Halliburton may actually work against them. The seasonality of the Canadian basin, combined with its relative lack of scale compared to the United States, makes it challenging for bigger companies to retain their competitive edge. “It just gets to a certain size and can’t warrant spreading itself out into Red Earth and Slave Lake and Red Deer and Fox Creek and Grande Prairie,” Salkeld says. “There just isn’t enough business – and that comes back to seasonality.” Oftentimes, it’s employees of larger companies that end up becoming their competitors. “You get to a certain size and then a whole crew breaks off, buys equipment and the next thing you know they’re Halliburton or Schlumberger’s competition.” He points to Element Technical Services, a company that offers coil tubing and hydraulic fracturing services and operates primarily in Manitoba and Saskatchewan, as an example of that reality. “Halliburton shut down Regina because there just wasn’t enough there. But you get an Element that’s part of that community and got the backing in that area, they’re the right size to meet that market demand.”
That’s the good news. The bad is that it’s now less likely than ever that we’ll see a Canadian company reach the same scale as the pre-merger versions of Schlumberger and Halliburton, much less the post-merged ones. That’s because it’s nearly impossible for Canadian companies to compete with them on the international stage, which is where they truly make their mark – and their money. “You go into the international market and the producers like to be able to make one call and come up with a Halliburton or a Schlumberger that can provide them with the integrated services,” Salkeld says. “There have been attempts to do that here in Canada, but the competition and the availability of all the different services just makes it almost impossible.”
That’s a departure from the way it used to be, when the equipment in some of those overseas markets tended to be old and technologically underwhelming. “Now, going overseas isn’t just a matter of carving out 10 per cent of your business in Canada and then going over there and hanging out a shingle. You have to start from square one, and it’s a very capital-intensive business –and you already have a capital-intensive business at home. Yes, you get revenue diversity, but especially in the last five years you’ve had such volatility in capital availability and demands on capital – either every customer wanted something, and you needed to build 10 of them, or nobody wanted anything and you were cutting costs and protecting the balance sheet. You’ve kind of been in a binary universe.” That universe, he says, has made Canadian management teams reluctant to venture abroad. “You have the big fish out there with lots of capital, lots of R&D and lots of customer contacts, and you really have to be able to offer something better to get that toehold. If you were just as good as someone else, fine, you can run a business there. But are you going to grow, are you going to outpace the market and be able to generate really good returns if you’re just as good as everyone else? Generally not.”
But, he says, that doesn’t mean that Canadian companies are confined to their own market going forward. They just need to be more strategic – and more specific – about where they look for new opportunities and how they pursue them. He points to Savanna Energy Services’ thriving Australian division, which brought its latest-generation workover rigs to the country’s Coal Seam Gas plays and has captured approximately 20 per cent of that market. “They’re not going to grow to 40 per cent market share,” Treadwell says, “but they’re a totally valid player in that market, and that’s a real business. That’s probably the best you can hope for.” Treadwell, a former solider, says that’s an approach that other Canadian service companies can apply in other markets, and he compares it to acting like a sniper rifle rather than a piece of heavy artillery. “You find a product or service here that’s transferable into a new market, and maybe you start trying to dominate but you understand that over time you’re not going to be 80 per cent of the market – you’re going to be 20 or 30.”
That might not produce a company that can become a one-stop shop like Haliburton and Schlumberger, but producing one that’s a leader in a more specific service line isn’t out of the question. Treadwell says that Shawcor is living proof of that, given that it’s effectively the only game in town when it comes to pipe coating. “They’ve built a global franchise, and they’ve done it in an area that probably avoided interest, for whatever reason, and so there’s not a big player there. [So] absolutely, it can be done.” He thinks the next global leader could emerge in the field of environmental management and mitigation, a field that’s set to grow exponentially in the near future. “Alberta is such an entrepreneurial area, and you’re always seeing new ideas come out around environmental stewardship, whether it’s disposal services or just being less energy intensive. I think there’s probably a lot of business lines that would have infinite transferability to a number of markets. It’s just a matter of getting to that size and knocking on the right door in those markets that can improve that for everybody.”
Trust issues
There was a time when the idea of a Canadian oilfield service company competing on the international stage wasn’t unthinkable. Scott Treadwell remembers when Precision Drilling, a company he used to work for, had aspirations of doing just that. “When I worked at Precision Drilling, the strategy was to really take a run at some of those global guys.” The reason they could, he says, was because of the quality of the equipment they were up against. “Today, the biggest impediment is the capital and the R&D spend that’s required to be relevant there. If you went back almost 15 years ago when I was working internationally, the rigs and the equipment that was over there was generally pretty junky. It was big, but it wasn’t very expensive.”
But the advent of the trust model, and the pressure it put on management teams to convert into one, sidetracked Precision’s plan to become a truly international player. On June 6, 2005, it sold its international division to Weatherford International for $2.3 billion in cash and shares, and announced its conversion into an income trust. And while it’s a decision that looks particularly bad in hindsight, given the late finance minister Jim Flaherty’s October 31, 2006 decision to make trust distributions taxable as of 2011 – one that effectively destroyed the trust model – it wasn’t the only company to make it. “Everybody flocked to the trust model, which basically gutted the international operations for pretty much every Canadian service company,” Treadwell says. “Had that not happened 10 years ago, it’s probably a different conversation today. But you just had to get rid of the international business if you were going to be a trust, and the bankers were telling guys that you could trade at $20 instead of $12 if you were one.”
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