HALLIBURTON: Merger makes a giant in oil services

09 April 1999
SPECIAL REPORT OIL & GAS

BIG now means seriously big when it comes to oil field services. When US heavyweights Halliburton Company and Dresser Industries completed their merger on 29 September 1998, it was described as one of the most significant events in the history of the industry. At a stroke, the new company, which operates under the Halliburton name, became the undisputed giant of the industry, with annual sales of $16,000 million, revenues 50 per cent higher than its nearest rival's, and 100,000 employees in over 120 countries. With a new corporate and management structure in place, Halliburton's next goal is to become the leading provider of integrated solutions for the oil and gas industry.

In retrospect, the merger could not have been more timely. When discussions first started in late 1997, the driving force was to bring together two companies with complimentary strengths and a minimal skills overlap. Today, with the oil industry struggling with the worst recession for over a decade, all the talk is of achieving maximum cost benefits through the economies of scale produced by the merger.

'When we began putting the deal together, the oil market was very different. The rationale was essentially to emphasise the strategic value of the two companies, rather than to achieve any cost savings. Then it was more of an opportunity to combine two very strong companies together,' says Dick Cheney, the former US secretary of state for defence who is chief executive of the new company. 'Given the state of the market today, the element of cost reduction is more important. In a sense we are fortunate that we are executing this merger in a downturn, as it puts the focus on getting as much out of the business as possible.'

Cheney, who was actively engaged throughout the negotiation process, says that much more time was spent on working out the practicalities of the merger than the issue of price. In the end, it was decided that the new Halliburton would consist of three core groups, looking after six business units.

Least affected by the merger is the Dresser Equipment Group, which continues as a stand-alone business that brings together nine companies involved in the design and manufacturing of pumps, valves, controls and other oil- related equipment. In the Energy Services Group, three units have been set up to target the exploration, development and production of oil and gas. The three - Halliburton Energy Services, Brown & Root Energy Services and Landmark Graphics Corporation - are dominated by companies from Halliburton but they also include several former Dresser companies, such as Baroid Drilling Fluids and Sperry-Sun Drilling Services.

The third group, known as Engineering & Construction, comprises the new Kellogg Brown & Root (KBR) and Brown & Root Services units. Cheney admits that before the implementation of the merger, KBR was the one he worried about most, particularly as Kellogg and Brown & Root had been engineering rivals for decades. 'But it has gone smoother than I expected. We took Jack Stanley [the former chairman and chief executive of The MW Kellogg Company] and Larry Pope from Brown & Root, who had previously had nine years of working with Kellogg, to head up the organisation and that has helped tremendously,' he says.

Although there are some technology and service crossovers, Cheney contends that the marriage of the two leading engineering companies will produce a far more formidable force than either could ever have hoped to be on their own. 'Kellogg was known as a very good engineering company, while Brown & Root's strengths have been in project management and construction. The merger allows both to use one another's strengths.'

At the same time, the new company is more focused on the energy sector. Several non-oil and gas companies previously in the old Brown & Root structure have been stripped out of the KBR unit and put into Brown & Root Services which has been established to service large-scale civil and military projects.

The restructuring and the appointment of senior management is only a first step for the new Halliburton. Cheney concedes that much work - to drive the new 'concept down the line' - still needs to be done. 'It is difficult to do it in isolation and the best way is to do a project...If people can pursue projects, it pushes people together...they see the sense,' he says. 'Shared services should also help. Through them, you achieve efficiencies as well as having the desired effect of integrating companies.'

Cheney's thinking has been shaped by experience. He recalls the time four years ago when he visited the Gulf as the then chairman of Halliburton. 'I remember coming to Abu Dhabi in 1995/96 and having to introduce the Halliburton Energy Services guy to Brown & Root's. They had never met before, even though they worked for the same company. People used to be able to operate as individual companies, but you cannot afford to do that today. You have to take advantage of your organisation to be more competitive.'

Reorganisation will also be required at the local level. 'Take Oman for example. There, we have offices for Halliburton Energy Services, Baroid Drilling and Security DBS scattered all over the place. There is a lot of work that now needs to be done in pulling the companies together and getting the cost savings out,' he says.

Halliburton firmly believes that integration of both its internal operations and core services will provide the platform for expansion. With its broad spectrum of competencies, ranging from exploration right up to the delivery of oil and gas to the market place, the company understandably attaches special significance to securing more large lump sum turnkey projects. Its wide geographical reach should also enable companies within the Halliburton system to be introduced to areas where they have not worked previously.

That includes the Middle East and North Africa, where the company has been active since 1928 and is now present from Algeria in the west through to Oman in the east. In the Gulf, KBR is currently working as programme manager on the Ruwais ethylene dichloride (EDC) project for Abu Dhabi National Oil Company (ADNOC), while Halliburton Energy Services has been involved in performing multiple hydraulic fracturing treatments, cementing and well testing on deep gas condensate wells for Petroleum Development Oman. Kuwait, Saudi Arabia and more recently Qatar are all important sources of business, and more may be on the way, especially in the Qatari petrochemicals sector.

Halliburton's interests may yet be extended further afield. Although no agreement has been reached yet, discussions have been held about acquiring a minority stake in Japan's Chiyoda Corporation. Says Cheney: 'Kellogg has had some good relationships with the Japanese and Asia has traditionally contributed the smallest part of our revenues. In this environment, there may be opportunities to strengthen our position.' The new Halliburton was an early product of the merger mania that is now sweeping the corporate world, and energy companies in particular. The oil field services sector has been intensely competitive since the mid-1980s, with the upturn in 1996 and 1997 offering some all too brief relief. For Cheney, the dominant theme over the past 15 years has been the need to take costs out of the business and to find new ways of employing the latest technology.

'The key for the whole oil industry is the continual drive to improve technology and reduce costs. We have all got better at what we do and it will continue,' he says. That is essentially why the Halliburton/Dresser merger has happened and why it is expected to be the forerunner to further consolidation.

Angus Hindley

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