Debt, a bust and now the DOJ? Halliburton and the oil patch

By Mike Lee | 04/11/2016 07:31 AM EDT

Shortly after the government sued to block the merger of Halliburton Co. and Baker Hughes Inc., the Department of Justice’s top antitrust lawyer was asked if his staff was looking at other oil and gas industry deals.

It was a timely question. The Halliburton suit was the government’s third antitrust case against energy investors or companies in a little under six weeks. And it happened as analysts continue to predict a wave of mergers among companies that are struggling to survive the worst oil bust since the 1980s.

"What we do in this market and any other market is, if a deal’s proposed, we take a hard look at it," Assistant Attorney General William Baer, the head of DOJ’s Antitrust Division, responded on a conference call with reporters. "If it’s a problematic deal, we either challenge it or find a way to fix the markets that are affected."


That answer — coming after the Obama administration won cases involving Apple Inc., airlines and beer makers — could make surviving the oil price crash even tougher for some companies.

Analysts and other observers said any antitrust scrutiny will likely focus on distinct sectors of the energy industry, but it’s still another hardship for an industry that’s getting clobbered by debt, low prices and changes in environmental policies. Well-timed buyouts could save some small or midsized oil companies operating on the margins.

One research firm estimated last year that the price bust could lead to $450 billion in energy deals designed to pool resources as debt and eroding profits collapse share prices. Oil prices have dropped to under $40 a barrel from more than $100 a barrel in early summer 2014. Natural gas prices have continued to fall, with lows around $2 per thousand cubic feet last year.

"The longer oil and gas prices remain depressed the more likely that industry consolidation will accelerate," Fadel Gheit, an analyst at Oppenheimer & Co., said in an email.

The logic is simple: Big companies are more efficient, and they’re better-equipped to handle boom-and-bust cycles.

Baker Hughes itself was formed from two older companies in 1987, at the bottom of that decade’s downturn. The late 1990s saw the mergers that created the "supermajors" — BP and Amoco, Exxon and Mobil, Conoco and Phillips.

Halliburton pitched its $34.6 billion buyout of Baker Hughes in the same terms. Both companies provide a mix of products and services — drill bits, pumps, chemicals, cementing and hydraulic fracturing. The plan was to combine the best-performing business lines, sell some of the others and emerge as a tougher competitor.

The Justice Department said it was skeptical from the beginning. Halliburton and Baker Hughes are already the second- and third-biggest oil field service companies, behind Schlumberger Ltd. If they merged, it would create a near-monopoly for some services and leave just two companies to dominate the market for others, the Justice Department said in its suit (EnergyWire, April 7).

Halliburton and Baker Hughes have said they’ll fight the DOJ suit challenging the deal.

Even before the Halliburton-Baker Hughes suit, the Justice Department was getting involved in the energy business. On March 1, it filed a criminal case against Aubrey McClendon, one of the pioneers of the shale-drilling boom and the co-founder of Chesapeake Energy Corp. The case was dropped after McClendon died in a one-car crash (EnergyWire, March 3).

On April 4, the Justice Department filed a civil suit against a San Francisco-based investment fund for failing to disclose billions of dollars in stock purchases in Halliburton and Baker Hughes. The fund, ValueAct Capital, has said it will fight the suit (EnergyWire, April 5).

The ValueAct suit was part of the Justice Department’s broader focus on activist fund managers, said Fiona Schaeffer, a partner at the law firm Milbank, Tweed, Hadley & McCloy.

Those managers often act as matchmakers between companies or try to promote strategic changes that will boost a company’s stock price. It’s a common practice, but antitrust law requires companies to disclose their holdings in a company if they’re taking an active role in its management.

"They really want to send a message to the hedge fund community," Schaeffer said of the Justice Department. "The agency has seen they’ve been overstepping the mark, and this was an example."

Overall, the Obama Justice Department has been more aggressive in challenging takeovers, and that approach has won praise from consumer groups. Previous administrations were too slow to challenge deals for the last two decades, said Diana Moss, president of the nonprofit American Antitrust Institute.

"We’re living with the fallout from that, which is higher prices," Moss said.

When and where the Justice Department will challenge other energy deals is an open question. The Halliburton deal was unique because the service industry was already controlled by big companies. There haven’t been any proposed mergers among the major oil companies, with the exception of Royal Dutch Shell PLC’s takeover of BG Group PLC (EnergyWire, April 9, 2015).

There are a handful of oil fields, like the Niobrara Shale in Colorado, that are controlled by just a few companies. If the exploration companies in those fields chose to merge, it could draw a challenge, said Ed Hirs, an oil industry veteran who teaches economics at the University of Houston.

Pipeline companies could be a target, too, particularly companies that build local networks to bring oil and gas from the wellhead to transportation hubs.

"A lot of those guys are in some sort of financial distress; they overbuilt their midstream assets," Hirs said.

The oil and gas producers themselves are likely to see less scrutiny, because they’re relatively plentiful, Hirs said.

Plus, he said, "if you’ve got a bunch of people going bankrupt, the odds are the DOJ is not going to stand in the way of helping creditors, customers and producers recover their money."

Reporter Saqib Rahim contributed.