Halliburton & Baker Hughes: The Devil’s In The Details by Doug Sheridan, EnergyPoint Research

If the devil lies in the details when it comes to Halliburton making its acquisition of Baker Hughes work for stakeholders, so might the opportunity.

We’ve pointed out in the past the convergence of performance as seen by customers among the industry’s largest suppliers.  We see elements of this same effect in the latest customer satisfaction scores for Halliburton, Baker Hughes and Schlumberger.  With the exception of Schlumberger’s marks in engineering and technology, there’s generally little difference in the three companies’ ratings across several key performance and organizational attributes.

Halliburton & Baker Hughes

Halliburton & Baker Hughes

Differences among the long-time rivals’ customer satisfaction scores are more revealing when examined across certain high-level product and service segments.  Schlumberger’s leadership in drilling-related and formation-and-well-evaluation services is certainly evident, as are higher ratings for its downhole drilling products (think Smith Bits).  Halliburton’s strength in completion services, driven by hydraulic fracturing, stands out as well, as does Baker Hughes’ relative strength in oilfield products.

Halliburton & Baker Hughes

Halliburton & Baker Hughes

The data become infinitely more interesting when examined through the lenses of two  questions we have related to the Halliburton and  Baker Hughes merger:

  • Will the merger improve the combined company’s competitiveness versus the broader set of oilfield suppliers with which it will compete?
  • Will the merger improve the combined company’s competitiveness versus arch rival Schlumberger?

To address these questions, we plotted the customer satisfaction scores of almost two dozen oilfield products and services in which both Halliburton and Baker Hughes compete.  Scores of each company were expressed relative to the peer group average, indicating outperformance (+) or under performance (-).

This construct led to each product/service falling into one of four quadrants: i) a relative strength of Halliburton; ii) a relative strength of Baker Hughes; iii) a relative strength of both Halliburton and Baker Hughes (redundant strength), or; iv) a relative weakness of both Halliburton and Baker Hughes (redundant weakness).

As is shown below, the resulting chart comparing the two companies’ customer satisfaction scores to their broader peer group across product/service lines yields the following:

  • Halliburton’s unique strengths lie in five categories: hydraulic fracturing, downhole cementing equipment, production chemicals (yes, you read it right), downhole motors, and intelligent sensors and controls.
  • Baker Hughes’ unique strengths lie in four categories: drill bits, cements, cementing services, and perforating services.
  • Halliburton and Baker Hughes share strength in a single category: completion packers.
  • Halliburton and Baker Hughes share weaknesses in seven categories: drilling fluids services, measurement-while-drilling (MWD), rotary steerable systems, logging-while-drilling (LWD), directional drilling services, sand control services, and completion fluids.

There are an additional five categories that emerge as neither strengths nor weaknesses for either company (i.e., redundant and average). These are: sand control equipment, perforating guns, drilling fluids products, wireline logging, and proppants.

Note – Since each chart is dual-dimensional in nature, the list of products/service lines plotted does not include artificial lift, fishing tools and services, or others in which either Halliburton or  Baker Hughes lacks, or effectively lacks, an offering.

Halliburton & Baker Hughes

Likewise, a chart plotting the two companies’ customer satisfaction scores relative to those of Schlumberger yields the following results:

  • Halliburton’s unique strengths lie in three categories: hydraulic fracturing, downhole cementing equipment, and downhole motors.
  • Baker Hughes’ unique strengths lie in two categories: cements and perforating services.
  • Halliburton and Baker Hughes share strength in a six categories: drilling fluids, sand control equipment, sensors & controls, sand control services, completion packers and perforating guns.
  • Halliburton and Baker Hughes share weaknesses in ten categories: drilling fluids services, measurement-while-drilling (MWD), rotary steerable systems, logging-while-drilling (LWD), drill bits, wireline logging, proppants, directional drilling services, cementing services, and completion fluids.

Halliburton & Baker Hughes

Update – On April 7, 2015, as part of an effort to address anti-competitive concerns arising from the merger, Halliburton announced it will place up for sale its fixed cutter and roller-cone drill bits, directional drilling and LWD product-service lines.

While countless insights can undoubtedly be drawn from these charts, two in particular caught our attention.  First is the realization that, to a greater extent than we originally realized, Halliburton controls its destiny when it comes to selling assets (should regulators require) that are duplicated across both companies.  Why?  Well, as we see it, the ability to keep the more competitive asset (by selling the less competitive asset) will always present itself.  This optionality clearly has value.

There’s also another insight that resonates with us.  Namely, the deal appears to do more for “new” Halliburton’s competitiveness versus its broader set of peers than versus arch rival Schlumberger.  We note the combined entity’s total number of unique strengths relative to Schlumberger are about half that compared to the broader peer group. This suggests simply combining Halliburton and Baker Hughes won’t be enough to fully compete with Schlumberger.  That is, the new organization is going to have to get better as well.