Further industry mergers appear likely - What's Ahead in 1999 - petroleum sector - Column

This has been a year of major mergers within the oilfield industry. Halliburton and Dresser, Baker Hughes and Western Atlas, and Schlumberger and Camco are among those joining forces this year.

We think these combinations and other M&A activity have strengthened the industry, enhancing its overall ability to provide customers integrated services and project management, as well as discrete products and services for both offshore and onshore needs.

This is definitely the case for the Halliburton/Dresser combination, which closed earlier this year. Dresser and Halliburton are united in their highly complementary operations to offer a broader, deeper array of services and equipment for both upstream and downstream markets. The combined company also is better-positioned to offset some of the effects of the current global economic uncertainties.

There is no question that the industry is currently in the midst of a declining market triggered by low commodity prices for oil and gas. However, the 1998 mergers position it to not only cope better with adversity, but to capitalize on growing opportunities that will emerge as conditions improve and markets rebound.

With the "big three" of oil field services involved in major mergers in 1998, M&A activity in 1999 will likely be more oriented toward smaller combinations, to further complement existing capabilities. The consolidation potential for the coming year appears greater among customers than suppliers. Low oil prices are prompting revenues to slide at mid-sized and small companies, causing a cash flow squeeze. Some are reportedly looking to sell assets, while others will be seeking to merge and become part of other companies.

The major oil companies, on the other hand, have the financial strength to ride out the downturn, plus initiate large mergers between companies to provide geographic diversification and a stronger international presence. More combinations like BP and Amoco could be on the horizon. The fact is that, like Halliburton and Dresser, customers recognize that they can do more together - and do it better at lower cost - with more expansive capabilities and operating synergies.

The more successful oil field service companies in 1998 had a strong presence in supporting offshore drilling activity, which remained at favorable levels despite the overall decline in the global rig count. Additionally, they were able to adapt to changing conditions in certain international regions.

Our firm also benefited from growing markets for pipecoating and flexible pipe and riser systems; favorable levels of engineering and construction activity involving LNG and EOR projects; and stronger performances from energy valve operations.

In 1999, we expect the industry's more advanced and readily available technology to play a major role in producing oil and gas more economically, especially in prolific deepwater plays, as well as meeting customer environmental needs. Technology will be focused on finding additional large reserves, developing smaller and less accessible reserves and reservoirs in previously inaccessible areas, and enhancing total recovery from existing reservoirs.

Producers will utilize "enabling" technologies, ranging from 3-D seismic and directional drilling to multilateral and subsea completions, FPSOs and ROV services. Deepwater hot spots will continue to be in the Atlantic Frontier, northern Norway, Brazil, the U.S. Gulf of Mexico and West Africa.

We think any significant oil pricing improvement in 1999 will be largely dependent on whether OPEC and nonOPEC nations can reduce supply sufficiently in response to the weaker demand growth anticipated as global economic activity slows. Of course, history has shown we can never rule out unforeseen events or developments that might intervene to alter prevailing supply-demand scenarios.

Other forces that should shape the industry in the year ahead include increased demand for integrated services by asset teams, information technology advances to enhance data interpretation/management, and the move toward greater outsourcing and sophistication by national oil companies. There also will be an increasing liquidity of the people market, allowing small independent companies to attract talent.

Although business conditions are projected to be more difficult in 1999, those companies that have strengthened themselves through technological advancement and other internal measures, in addition to mergers and acquisitions, should be able to further implement bold initiatives. These will take the energy industry to new heights, as it moves into the new millennium and realizes the immense opportunities that remain before it.

William E. Bradford was elected chairman of the board and CEO of Dresser Industries in December 1996. He graduated from Centenary College in 1958 with a BS degree in geology and attended the Executive MBA program at the University of Houston. Mr. Bradford joined the company in 1963 as executive vice president of Analytical Logging Corp., which was purchased by Dresser Magcobar. In 1970, he became product manager, D.A.T.A. Systems, for the Swaco Division and later advanced to area manager, Mid-Continent, for the Oilfield Products Group. From 1975 on, he advanced to positions of increasing responsibility, including posts in London and Houston. In 1985, he was named senior vice president, Dresser Industries. Mr. Bradford was appointed president and CEO of Dresser-Rand Co. in 1988, and was elected president and COO of Dresser Industries in 1992. He is a member of numerous professional associations and societies, including NOIA (1998 chairman) PESA (board member), API, the National Petroleum Council, Manufacturers' Alliance (board member), SPE and the Mid-Continent Oil & Gas Association.

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