Cover Story: Determined defianceby Indrajit Sen on Feb 13, 2017
The global oil and gas industry has been going through testing times (not to mean that circumstances are any less trying now) brought about by the fall in crude oil prices, coercing NOCs and IOCs alike to roll back investments and slash capital expenditure. The impact has been detrimental to the very existence of product manufacturers, service providers and contractors alike, which have been left reeling in the last couple of years from the lack of demand for their offering – even if it is the case of the world’s second largest oilfield services company.
Of the many downturns in the global oil and gas industry that Halliburton has witnessed in nearly a century of its history, including about 75 years in the Middle East, the year 2016 has been one of the toughest years for doing business, according to the regional leader of the company. Although following the recent deal between OPEC and non-OPEC oil producers to cut output, Halliburton has begun to see some bright spots in its home market in North America – which has been suffering the most in the world from the decline of crude prices, Ahmed Kenawi feels it will be a while before the situation fully recovers on a global scale, for oilfield services providers like Halliburton to be able to sustain themselves.
“We’ve encountered pricing pressure on existing contracts through discounting, as well as very competitive re-pricing on new tenders, as both large and small competitors try to maintain or grow their share of a shrinking customer budget,” Kenawi tells me during an exclusive interview. “We’ve responded to these pressures by focussing on cost reductions as well as optimisation and efficiency of how we conduct our operations. While revenue has declined year over year, these actions have helped mitigate the bottom line impact, but margins are off from the peak in prior years.”
Kenawi, who has been with Halliburton for 22 years now and has been the company’s senior vice president for the Middle East and North Africa region for the last couple of years, says international service providers doing business in the regional oil and gas industry have been feeling a greater pinch of the downturn due to the long-term nature of the contracts here that they work on. “In my opinion, North America is a transactional market. So they (players involved) work on very transactional prices and contracts. However, in the Middle East and North Africa, we (Halliburton) are based on long-term contracts; in some cases really long-term contracts, some (for a period of) over nine years. This is where you can see that during the down cycle, you can have tenders that can affect you with lower prices and this is what I see as one of the differences (between the two regional markets),” he says.
Halliburton’s resilience has been further tested in recent times, as coupled with the immense pressure of the market slowdown, the company has had to witness the unpleasant situation of having to deal with an unsuccessful merger bid. Halliburton’s ambitious attempt worth $28bn to merge with Baker Hughes, the third largest global oilfield services company, was prevented by authorities in the US and Europe from seeing the light of day, who cited anti-trust and duopoly concerns. The two parties in May last year announced that the deal stood nullified, dealing Halliburton a further financial blow of $3.5bn which it had to pay its Houston-based competitor as termination fee.
Standing tall against odds
‘That which does not kill us makes us stronger’, as the famed saying goes. Kenawi feels the failed merger attempt was nothing of a setback to Halliburton, and in fact says the entire episode has only strengthened the company’s resolve to actively seek more M&A opportunities. “What I can say about the merger, is the Baker acquisition (bid) was a means to an end. Our strategy is to grow and provide leading returns to our shareholders. The proposed Baker Hughes transaction was going to help us accelerate the growth part of our strategy quickly, but it has not changed where we are going or what we’re doing,” Kenawi, a veteran who has been with the industry for 25 years, says.
“There will always be mergers and acquisitions in our industry as companies attempt to grow. The proposed transaction may change the names of the competitors or who is in charge, but it will not change our demonstrated track record of having a successful strategy, core values or the unique way we go to market,” Kenawi tells me.
As for tackling the prevailing harsh economic conditions, and driving the company’s growth despite the odds, Halliburton’s regional strategy, as per Kenawi, is aligned with the global three-pronged policy – to bank on the company’s core strength of working on mature fields, unconventional and deepwater projects. Barring a few in Egypt, since deepwater projects are uncommon in the MENA region, Halliburton’s principal focus is delivering on mature fields. It is worth noting that high levels of oil production has left the region’s NOCs with oilfields having maturing reserves, leading to a spurt in demand for developing mature assets – a domain that requires effective project management.
Kenawi elaborates: “Our principal focus is on mature fields, which requires strong project management. We believe that this ever-increasing demand for project management in these turnkey projects will enable continued leadership and expansion for Halliburton in this domain. (About) 84% of the MENA reservoirs are mature fields, (developing) which is based on intervention and we are growing in this area as well.
The other critical strategy for expansion is unconventional (projects), where we have a good market share in North America and can bring that experience to the MENA. To summarise, definitely we will go into mature fields and unconventional and we will grow dramatically in this. We will have acquisitions that help us achieve these solutions in these two areas.”
The growth in demand for mature fields projects has in turn led to increasing use of enhanced oil recovery (EOR) methods – which to Kenawi is an emerging trend in oilfield technologies. “I think that in the MENA region, EOR is the most important thing. The (oilfield services) provider that understands EOR and the benefits of all product service lines collaborating to deliver the best solutions will be a winner in this market,” he believes.