HALLIBURTON & BAKER HUGHES DEAL

Two of the biggest oilfield services companies, Halliburton and Baker Hughes, are discussing a merger that would help both companies fend off falling oil prices, the Wall Street Journal reports. While many industry observers have speculated that lower crude prices — U.S. benchmark crude dropped below $75 a barrel Thursday — could spark some consolidation, it's surprising that the wave of mergers is starting with two of the industry's biggest players.

The services side of the energy business has already undergone consolidation among some of the larger players, including Baker Hughes' $5.5 billion acquisition of BJ Services in 2010 and General Electric's $3.3 billion purchase of Lufkin Industries last year.

The next wave of deals was expected to come as smaller, more specialized service companies bought up others to augment the portfolio of equipment and services they sell. The U.S. onshore market, in particular, remains highly fragmented. A combined Halliburton and Baker Hughes, for example would control just 25 percent of the U.S. hydraulic fracturing market, the Journal reported.

That leaves a lot of room for other deals as companies clamber to shield themselves from falling crude prices. Shares of other service companies such as Weatherford International, Ensco and Nabors Industries all rose after news of the Halliburton deal hit the market Thursday.

Declines in commodity prices tend to affect service companies more directly. Before the deal was reported Thursday, shares of Baker Hughes and Halliburton had tumbled more than 30 percent since July.

Halliburton and Baker Hughes have been in talks for several months, as prices began to slide, Bloomberg reported. While the deal may be a response to declining oil prices, it also shows that Halliburton is using what it sees as short-term volatility in the oil market to strengthen its position against rival Schlumberger. Halliburton chief executive David Lesar told Bloomberg recently that he believes prices will stabilize next year and then begin climbing again.

The deal is likely to face significant anti-trust hurdles, especially in areas such as cement services, where the two companies would dominate the market. That means the companies are likely to be selling assets to win regulatory approval, which is likely to add to the deal activity in the services sector in the coming year.

forbes.com