Tuesday, September 1, 2009

Horizontal Drilling, M&A and the Future

To me, the biggest story coming from Wall Street today was not the acquisition of Marvel by Disney (although that's an interesting story and says a lot about where Disney really is) but the acquisition of BJ Services by Baker Hughes for $5.5 billion.  (Wall St. Journal article - good for seven days)

BJ Services is an energy services company (note that I no longer say "oilfield services company") that Baker Hughes actually spun off in 1991. It is one of the industry leaders in pressure pumping and hydraulic fracturing services.  With the acquisition, Baker Hughes can now offer a soup-to-nuts approach that large energy customers, such as state owned energy companies, now prefer.  Baker Hughes, along with Schlumberger and Haliburton, are the big three of energy services companies, but Baker Hughes lags the other two because it missed the boat on emerging technologies like hydraulic fracturing.  With the addition of BJ Services, it can join the other two with a full portfolio of services.

The story is interesting to me because it reinforces my belief that the Haynesville Shale and the other big gas shale plays are on the leading edge our energy future.  What's going on in the Haynesville Play is a microcosm of the future of the energy business, at least in the near-term.  The energy story in North America in the next decade is going to revolve around natural gas.  Why?  Because there is so much of it that now is economically accessible.  Why is that?  Because of the rapid development of technology associated with horizontal drilling.

Alternative energy is the long-term future, but we aren't going to be able to flip a switch to a green tomorrow.  It's going to take years of painful stop-and-start development to get there.  But the political, environmental and enconomic reality is that we quickly have to break with the past, as represented by oil (foreign) and coal (dirty).  The path to future sustainability, at least proverbially, is paved with natural gas.

Natural gas might be having trouble making its case now, but in the next few years its virtues will become clear to policymakers.  It is plentiful and relatively clean.  Most importantly, it is home-grown.  Geopolitics are going to drive the train in a few years.  Why be dependent on the Middle East when we have our own sources of fuel at home?  The big integrated oil companies have already figured it out.   They are all over natural gas, at home and abroad. (Some of them like solar too, but not as much.)  The free market is starting to come around, and that means the government will follow.  Eventually.

Baker Hughes is smart enough to know that it wants a seat at the table, and it realizes that it has to buy its way there.  At this point, the price is $5.5 billion.  For a company with a market capitalization of around $11 billion, that's a very thoughtful, and probably painful, decision.

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