Tuesday, September 1, 2009

HOUSTON | Oil field services company Baker Hughes Inc. said Monday that it will buy BJ Services Co. in a cash-and-stock deal valued at $5.5 billion, a move that may signal further consolidation in the industry.

The combined company will provide customers with a one-stop shop for a variety of oil field services, and allows Baker Hughes to diversify its product offering and to compete better with rivals Schlumberger Ltd. and Halliburton Co.

This deal could be the first of many acquisitions in the industry, said Chris Sheehan, director of M&A Research at IHS Herold Inc. Mr. Sheehan said small- to midsize companies that specialize in international deepwater drilling and production oil services are particularly well positioned to be acquired.

“For companies to gain a competitive or technical edge … players in this sector would find it advantageous to seek strategic acquisitions,” Mr. Sheehan said in a phone interview. Following the move by Baker Hughes, Mr. Sheehan expects further consolidation in the oil field services sector, especially among companies focused in unconventional shale gas.

These players specialize in accessing hard-to-reach shale gas fields through such methods as pressure pumping.

Notably, Baker Hughes will gain BJ Services’ pressure-pumping business, which will help clients with such unconventional gas and deepwater fields, said Chad Deaton, Baker Hughes chairman, president and CEO.

“It will better position us to drive international growth and to compete for the growing large integrated projects by incorporating pressure pumping into our product offering,” he said. Integrated oil companies are active in all phases of the business including production, refining, transportation and marketing.

Pressure pumping made up less than 1 percent of Baker Hughes 2008 revenue, but is expected to comprise about 20 percent of the company’s revenue after the deal is complete. Pressure pumping injects liquid or gas into wells to increase the amount of recoverable oil or natural gas. This added business will boost Baker Hughes’ total revenue near levels of its two largest competitors, the company noted. Schlumberger Ltd. is the world’s largest oil field services company, with Halliburton Co. just behind it in size.

Pritchard Capital Partners analyst Stephen Berman said the combined company will have BJ Services’ pressure-pumping franchise and Baker Hughes’ international market share.

But Wachovia analyst Tom Curran remained skeptical. While he expects the deal to help the company compete in bidding for foreign integrated projects in the long term, he believes excess capacity in North American pressure pumping and the timing of the deal will hurt the company in the near term.

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