A federal antitrust probe into the $36 billion hydraulic fracturing market is increasing pressure on oilfield-service companies already reeling as skyrocketing competition cuts into their profit margins.
Halliburton Co. (HAL:US) and Baker Hughes Inc. (BHI:US) said this week the U.S. Justice Department is seeking documents for an antitrust investigation related to pressure-pumping services, which include hydraulic fracturing, or fracking. Stephen Harris, a spokesman for Schlumberger Ltd. (SLB:US), the world’s largest oilfield-services company, declined to say whether it has been contacted by investigators.
The investigation was met with widespread surprise among industry analysts and investors because it comes at a time when rising competition and falling prices have been the business’s biggest problem.
“It’s a big industry, it has lots of competition, and right now the price of a frack job is as cheap as its been in the last three years,” said Richard Spears, vice president of Spears & Associates, an industry consultant in Tulsa, Oklahoma. “I can’t speculate what they’d be looking for or what they would find.”
Companies providing fracking services have seen some of the industry’s biggest profit gains followed by the steepest declines as a flood of new business from the U.S. shale boom brought rivals rushing in.
News of the investigation drew attention both to land-based fracking, where more than 50 service companies currently are vying for orders in the U.S., and to offshore fracking, where Baker Hughes and Halliburton provide the bulk of service in the Gulf of Mexico.
Of the $36 billion that explorers and producers are expected to spend on fracking globally this year, $31 billion will be spent in the U.S. and Canada, Spears said.
The Justice Department confirmed the probe, but gave no details about what it’s looking into.
“The Antitrust Division is investigating the possibility of anticompetitive practices involving pressure pumping services performed on oil and gas wells,” said Gina Talamona, a spokeswoman for the department’s antitrust division.
““Overall, I’m baffled by it,” said Bennett Vig, executive director at Dallas-based Round Rock Capital, whose fund owns an undisclosed number of shares in Halliburton and Schlumberger.
Halliburton rose to a high of $57.27 a share two years ago and has since fallen 23 percent while Baker Hughes declined 41 percent in the same two-year period. The Philadelphia Oil Services Index has climbed 26 percent since the middle of 2011.
Joseph Simons, a partner at the firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, said the government often issues Civil Investigative Demands, or CID’s, without pursuing formal charges. “It’s common for CIDs to go out, for the government to investigate, and for an investigation to close without any action,” Simons, a former chief antitrust enforcer at the Federal Trade Commission, said in an interview.
Halliburton confirmed it had received a CID from the antitrust division during the second quarter, according to an e-mailed statement yesterday. The company said it is cooperating with investigators, and understands “other participants” in the industry had received similar requests.
Baker Hughes said it had no comment on the investigation after revealing in a July 24 filing that it had received a request for information from investigators on May 30.
The U.S. fracking market, the world’s largest, peaked in the second half of 2011 as prices soared with surging demand from the shale drilling boom. The pressure-pumping technique involves blasting water mixed with sand and chemicals underground to free the oil and gas.
Companies such as Halliburton and Schlumberger were able to push fracking prices higher as a backlog of uncompleted wells swelled to 3,500 in the middle of 2011 from 1,145 in the second quarter 2010, according to Halliburton. Producers saw delays stretch as long as six months waiting for drilled wells to be completed with the fracking technique.
An oversupply of equipment that exceeded demand by as much as 29 percent developed in the industry by the fourth quarter last year as competitors poured into the market, according to PacWest Consulting Partners LLC, a Houston-based industry adviser. Prices charged for U.S. fracking services slid 14 percent in 2012 and are expected to fall another 6 percent this year, according to PacWest.
Halliburton, which owns 15 percent of the equipment horsepower underpinning the U.S. pressure pumping market, saw its operating profit margin drop to a low of 11 percent in the fourth quarter last year from an average of 31 percent in 2011 in its North America completion and production division, which handles fracking.
Baker Hughes’s profit margin for North American fell to a low of 8 percent in the second quarter this year after reaching a high of 22 percent in the third quarter 2011.
The market share of the four largest fracking service providers is projected to slip to 43 percent in the fourth quarter this year from 57 percent in the third quarter 2011, according to PacWest.
“The market is way oversupplied,” said Luke Lemoine, an analyst at Capital One Southcoast in New Orleans. “It’s crazy to think that any of these guys would collude because they all - - I don’t want to say hate each other -- but they’re true competitors.”
The antitrust probe turned some eyes to the less talked-about offshore fracking business. Deep-water fracking, a smaller market than the booming business created by onshore shale field exploration, is less competitive, said Surya Rajan, director of upstream research at industry consultants IHS-CERA. That’s partly because of the higher costs necessary to do the boat-based work, said Rajan, a former fracking engineer who worked at service-provider Schlumberger and later at Marathon Oil as a fracking customer.
Baker Hughes and Halliburton each own two fracking boats that operate in the Gulf of Mexico; Baker Hughes said in May it is adding a third to its fleet, and Schlumberger said on its website it’s launching five new so-called stimulation vessels this year to work in the deep-water Gulf, Indian Ocean and North Sea.
Ultimately, however, the offshore pressure-pumping market remains small compared to the North American land business, said Alex Robart, a principal at PacWest.
Brian Youngberg, an analyst at Edward Jones in St. Louis, said he’s puzzled by what investigators might be searching for.
“The timing of their review is confusing,” he said in a phone interview yesterday.
Schlumberger, Halliburton and Baker Hughes are the three largest providers of oilfield services globally.
Privately held FTS International Inc., based in Fort Worth and the third-largest provider of fracking services in the U.S. behind Halliburton and Schlumberger, said it has not been contacted by the Justice Department.
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