Proposed merger of oilfield firms poses challenge to Schlumberger

(Reuters) - The proposed merger of oilfield service companies Halliburton Co (N:HAL) and Baker Hughes Inc (N:BHI) would create a serious challenger to Schlumberger NV (N:SLB) in international markets and cement the two companies' dominance in North America.

And that is the problem, according to some analysts.

"The proposed merger would be dominant in North America, which could spur protracted (antitrust) scrutiny; and likely elicit howls of protest from customers everywhere, potentially requiring concessions to more than one national anti-trust authority," analysts at FBR Capital Markets wrote in a note.

Baker Hughes disclosed after the market closed on Thursday that it was in preliminary merger talks with its Houston neighbour.

But muted market reaction on Friday highlighted the likelihood that any deal would face an uphill regulatory battle.

Baker Hughes' shares were up 0.2 percent in early afternoon trading on the New York Stock Exchange while Halliburton's were up 1.4 percent. Schlumberger's stock was up 0.4 percent.

A combined Halliburton-Baker Hughes would have combined revenue of about $52 billion, based on 2013 results, outstripping Schlumberger's 2013 revenue of $45.3 billion (28.89 billion pounds).

The merged company's business in North America would also be about double that of Schlumberger, which gets more than two-thirds of its revenue from international operations.

Still, the merged entity's market value of about $70 billion would be far less than Schlumberger's $120 billion.

Baker Hughes, whose shares were trading at $58.38 at midday, should be able to command a 25 percent premium to its Wednesday close of $50.98 for an enterprise value of $25.46 billion, Evercore ISI analyst James West said in a note.

The proposed deal would give Halliburton, the No. 2 oilfield services provider, the leading market share in oilfield services such as directional drilling, coiled tubing and drill-bits, unseating Schlumberger in all three markets, said West.

A deal would not be all bad news for Schlumberger, however. Analysts said that by reducing the number of big players in the industry to two from three, pricing could stabilise.

"Schlumberger, Halliburton and Baker Hughes have been in a knife fight the past few years for international and offshore tenders," Tudor, Pickering, Holt & Co analysts said.

"A combined company could help introduce more discipline to these bid processes and ultimately improve returns/profits for the industry." 

(Reporting by Swetha Gopinath in Bangalore; Editing by Ted Kerr)