Here's why oil consolidation talks are starting

Will Halliburton (HAL) buy Baker Hughes (BHI)?

That's not clear, but one thing's for sure: This is one of the side-effects of lower oil prices. It will accelerate industry consolidation.

When oil prices go down this much, it means the pie is going to shrink and there is going to be a food fight for the smaller pie.

The oil service guys like Halliburton know the oil companies are going to drive a very tough deal when it comes to their 2015 budgets.

When you have two big oil service companies that come together they have a much better chance of being able to push back and become a more formidable company.

If you're an oil service guy looking at the possibility of low oil prices, with Baker Hughes down 10 percent this quarter alone, this is like a one-day sale in Macy's. Tomorrow the prices may not be this low.

Does it make sense? There are certainly synergies. It would give Halliburton more international exposure, but more importantly it would give Halliburton more product lines they could use for "integrated solutions."

That's a fancy word for cradle-to-grave help for oil companies. They can be involved in everything: Finding oil, drilling it, completing the well, reworking the well. Everything.

In synergies, you can get some magic numbers. They want 1 + 3 = 6. They want to capture more talent. Increase market share. Increase resources. Have a bigger global footprint. They just want to build a better team.

Also, when you combine two companies like this, you get economies of scale. Economies of scale in a low-price commodity environment makes sense because the low-cost service provider is going to be the one who survives any downturn, if one comes.

Whether this deal happens or not is only incidental. This is the first shot.

This will also happen to the oil patch. Let's speculate, for example, about ExxonMobil (XOM).

Does Exxon have a short list of companies it would love to acquire, for the right price? Sure it does.

What would an Exxon want? Look at it this way: The big question for Exxon is, what areas in our portfolio do we need to strengthen?

The likely answer is, what they need most of all is reserve replacement. More oil and gas. Exxon produces 2.1 million barrels of oil a day, and 10.6 billion cubic feet of gas per day. It can't find enough to replace all that.

Who would help them replace that? Somebody with a big presence offshore.

Like, uh, BP (BP). Or Royal Dutch (RDS).

I know, it sounds ridiculous. These are two of the big giants. Exxon has a $400 billion market cap. BP has a $125 billion market cap. Royal Dutch has a $227 billion market cap.

But think about it. The ultimate goal for a company that wants to build an economy of scale is for #1 to buy #2 or #3 or #4. When you are #1, buying #20 doesn't get you much scale.

But if you buy one of your main competitors, you squish the competition for a long time. You have the biggest cost savings. You are way ahead of everyone.

Of course, that's why you have regulators. Tough to get through.

Regardless: Now it gets interesting.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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