Europe's Oil Service Shares Rise on Merger Hopes

By Selina Williams 

LONDON--Shares in many of Europe's battered oil services companies have risen on speculation that a tie-up between U.S. giants Halliburton Co. and Baker Hughes Inc., in a deal valued at $34.6 billion, would spur further consolidation in the sector to mitigate slumping oil prices.

Shares of Saipem SpA, the oil-services subsidiary of Italian oil company Eni SpA, have increased around 6% since the Halliburton-Baker Hughes transaction first emerged on Friday. A stake in the company is already up for sale. Eni said earlier this month that it had hired Credit Suisse to study the options for selling all, or a part of its 43% holding in the oil services company.

French project management, engineering and construction company Technip SA, U.K. engineer John Wood Group PLC, and underwater engineering and construction specialist Subsea 7, also were among those companies that have been trading higher since Friday, with gains of 2.9%, 3.5% and 6%, respectively.

Even Norwegian offshore oil driller Seadrill Ltd., that has been buffeted by sanctions in Russia where it had a big contract with state-controlled Rosneft, saw its share price rise 1.8% in the same period.

"The Halliburton deal is supportive for valuations following what's been a rough year for oil-service companies given the drop in oil prices," said Christopher Møllerløkken, equity analyst at SpareBank.

By contrast, companies exposed to the U.S. shale industry, such as Weir Group PLC, which supplies high-pressure pumping equipment for unconventional oil and gas production, and firms in Europe's overcrowded seismic sector, such as France's CGG and Norway's TGS, fell back.

Shares in oil-service firms that help oil companies find and extract oil and gas deposits by providing equipment like rigs, drill parts, tools and engineering of pipelines and projects, were already sinking before the oil price started falling this summer.

This is because their customers--the oil companies--had started shelving expansion plans for multibillion-dollar projects and shedding operations with particularly tight profit margins, and squeezing rates before the oil-price decline.

However, even though weaker share prices are making many companies look attractive, a deal in the European sector would face obstacles, said Neill Morton, oil and gas analyst at Investec.

Antitrust issues preventing dominance of any one sector could hamper a deal. For example, the subsea construction and engineering sector is dominated by three big companies, Technip, Saipem and Subsea 7. Financial and cultural barriers, like different languages, could also be an obstacle, he added.

Furthermore, the top executives of some companies have been focusing on trying to manage the downturn in their business through cost-cutting measures, such as the job cuts and factory closures announced recently by Weir Group, and may be reluctant to consider merging as a solution.

"Some companies could merge, but they can't afford others and would have to do it on a share-for-share basis and it is hard to reach agreement on that when management feels the company is undervalued," said Mr. Møllerløkken of SpareBank.

Kjetil Malkenes Hovland in Oslo,

Eric Sylvers

in Rome and Inti Landauro in Paris contributed to this article.

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