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Oil services giants expand despite oil price crash

Economy

Oil services giants expand despite oil price crash

Oil Petroleum Barrels

Oil Barrels

It would normally be reasonable to think that when a sector faces a massive decline, operators in that sector would scale back. This would be the most conventional approach. By taking capital off the table and waiting for the storm to pass, enterprises can then use resources to scale back up when conditions are more favorable. Well, in the highly competitive-and lucrative-field of oil industry services, this conventional thinking isn’t going to wash. Instead, oil services giants Schlumberger (NYSE:SLB) and Halliburton  (NYSE:HAL) are looking at the global decline in oil prices as an opportunity to expand their way into a larger chunk of the global oil services market.

Schlumberger and Halliburton have apparently resolved to not just survive the current downturn but emerge bigger than ever. This is quite a risky gambit considering it is anyone’s guess when oil will stabilize or if it will even find a sustainable bottom this year. Still, Schlumberger has agreed to purchase a $1.7 billion stake in a drilling business in Russia and Halliburton has reiterated its plans to buy rival oil services company Baker Hughes for a whopping $34.6 billion.
From a value investor perspective, these two giants’ moves are not just understandable but expected. Normally, during industry slumps, opportunities-often once in a lifetime opportunities-present themselves. The bigger opportunity here is the Baker Hughes deal. This consolidation can leave Halliburton a leaner and more efficient and effective industry player. Of course, all this is good news only from a fundamental investment perspective. In terms of job security, these types of deals usually herald large waves of job losses. The impact on the local and national US economy might be negative in the short-term.

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