Fracking faces antitrust probe

Competition is already hitting profits

A federal antitrust probe into the $36-billion hydraulic fracturing market is increasing pressure on oilfield-service companies already reeling as skyrocketing competition cuts into their profit margins.

Halliburton Co. and Baker Hughes Inc. said Thursday the U.S. Justice Department is seeking documents for an antitrust investigation related to pressure-pumping services, which include hydraulic fracturing, or fracking.

Stephen Harris, a spokesman for Schlumberger Ltd., the world’s largest service company, declined to say whether the company has been contacted by investigators.

Schlumberger, Halliburton and Baker Hughes are the three largest providers of oilfield services globally.

The investigation was met with widespread surprise among industry analysts and investors because it comes at a time when rising competition and falling prices have been the sector’s biggest problem.

“It’s a big industry, it has lots of competition, and right now the price of a frack job is as cheap as its been in the last three years,” said Richard Spears, vice-president of Spears & Associates, an industry consultant in Tulsa, Okla. “I can’t speculate what they’d be looking for or what they would find.”

Companies providing fracking services have seen some of the industry’s biggest profit gains followed by the steepest declines as a flood of new business from the U.S. shale boom brought rivals rushing in.

News of the investigation drew attention both to landbased fracking, where more than 50 service companies currently are vying for orders in the U.S., and to offshore fracking, where Baker Hughes and Halliburton provide the bulk of service in the Gulf of Mexico.

Of the $36 billion that explorers and producers are ex- pected to spend on fracking globally this year, $31 billion will be spent in the U.S. and Canada, Spears said.

The Justice Department confirmed the probe, but gave no details about what it’s looking into.

“The antitrust division is investigating the possibility of anticompetitive practices involving pressure pumping services performed on oil and gas wells,” said Gina Talamona, a spokeswoman for the department’s antitrust division.

“”Overall, I’m baffled by it,” said Bennett Vig, executive director at Dallas-based Round Rock Capital, whose fund owns an undisclosed number of shares in Halliburton and Schlumberger.

Halliburton rose to a high of $57.27 a share two years ago and has since fallen 23 per cent while Baker Hughes declined 41 per cent in the same twoyear period.

Joseph Simons, a partner at the firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, said the government often issues Civil Investigative Demands, or CID’S, without pursuing formal charges. “It’s common for CIDs to go out, for the government to investigate, and for an investigation to close without any action,” said Simons, a former chief antitrust enforcer at the Federal Trade Commission.

Halliburton confirmed it had received a CID from the antitrust division during the second quarter, according to an emailed statement.

The company said it is cooperating with investigators, and understands “other participants” in the industry had received similar requests.

The U.S. fracking market, the world’s largest, peaked in the second half of 2011 as prices soared with surging demand from the shale drilling boom.

The pressure-pumping technique involves blasting water mixed with sand and chemicals underground to free the oil and gas.

Companies such as Halliburton and Schlumberger were able to push fracking prices higher as a backlog of uncompleted wells swelled to 3,500 in the middle of 2011 from 1,145 in the second quarter 2010, according to Halliburton.