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Not all oilfield services M&A transactions will create competition concerns, says expert

Out-Law Analysis | 04 Feb 2016 | 8:30 am | 2 min. read

FOCUS: Delayed or denied regulatory approvals top the list of factors seen as most likely to jeopardise future oilfield services mergers and acquisitions - but not all such deals will catch the attention of competition authorities.

For more in depth analysis on Pinsent Masons' research on oil and gas services, see our Ahead Of The Curve special reports.

Regulatory barriers and lengthy antitrust investigations into several proposed 'megamergers' involving oilfield services companies have hit the headlines in recent months, with the European Commission's announcement of an in-depth investigation into Halliburton's acquisition of Baker Hughes the most recent example. It is no surprise, therefore, that delayed or denied regulatory approvals topped the list of concerns in a recent survey of oilfield services professionals done on behalf of Pinsent Masons, the law firm behind Out-Law.com.

Oilfield services deals have the potential to raise red flags for competition law authorities for several reasons. As noted by the European Commission, there are only four globally active companies - Schlumberger, Halliburton, Baker Hughes and Weatherford – and technological and financial barriers to entry into the industry are high. The EC's basis for intervention is that only the top three of these companies are currently able to provide integrated services across the majority of product and services lines, and the proposed Halliburton/Baker Hughes deal could reduce the choices available to customers from three to two.

But competition concerns will not arise in every oilfield services transaction. In deals involving smaller players where the services provided are not direct substitutes, significant competition concerns are unlikely. While the proposed Halliburton/Baker Hughes tie-up demonstrates that regulatory authorities pay close attention to the energy markets, the case is also a good example of the varying degrees of competition at different levels of the oilfield service supply chain.

In this case, the Commission is concerned both about reduced competition in particular markets in the distribution chain - for example, individual drilling and exploration products and services, which are largely defined narrowly by the Commission. But it is also considering the reduction in competition between companies offering an overall 'integrated service', which can only be offered by a limited number of market players.

The terms of the proposed Halliburton/Baker Hughes deal have also been criticised by the Department of Justice (DOJ) in the US. The companies announced in December 2015 that they were extending the time period for closing the deal as they had been unable to agree terms with the DOJ, which has told them that a planned divestment programme which will go ahead as part of the merger is insufficient to address its competition law concerns.

Contrast this with the DOJ's reaction to the other recent oilfield services megamerger - the proposed acquisition of equipment maker Cameron International by market leader Schlumberger. The DOJ cleared this deal without any conditions as a result of the different product lines offered by the two companies. The European Commission must issue its own decision by 5 February, with the deal expected to receive unconditional approval.

Successful outcomes for these megamergers are likely to lend more confidence to dealmakers. At present, market commentators have suggested that the Halliburton/Baker Hughes merger will almost certainly result in a fair amount of divestment if it is to go ahead, such as Halliburton's fixed cutter and roller cone drill bits, directional drilling and logging-while-drilling/measurement-while-drilling businesses, as well as the potential opening up of licensing for certain technologies.

Companies keen to make an acquisition should therefore be aware that concerns may be raised where the target is a close competitor, be it for narrowly defined products or services or for a wider integrated service. Due to the size of most oil and gas companies, the turnover tests at EU or national level are likely be reached, giving authorities jurisdiction to review a large number of transactions.

Angelique Bret is a competition law expert at Pinsent Masons, the law firm behind Out-Law.com.

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