GE, Baker Hughes merger to shake up oilfield services sector

By Shivani Mody

General Electric Co (GE) announced that it will merge its oil & gas business with Baker Hughes Inc (BHI) on 31 October, to create a new oilfield service (OFS) business. The merger will see the creation of the world’s second-largest oilfield services provider as competition heats up to supply more-efficient products and services to the energy industry after several years of low crude prices.

Given GE and BHI’s strong positions in digitally-based applications and downhole technology, respectively, the new entity will be well-positioned to benefit from a strengthening global E&P sector. Also, the combination comes at a favourable time for both companies as prolonged commodity price weakness increases the value of efficiency gains within the OFS sector.

“The merger of GE Oil & Gas and BHI will create a new, more technologically advanced breed of OFS company that is well-placed to benefit from an E&P recovery. The new venture will have strong capabilities to both boost productivity from core unconventional plays and compete for market share in emerging offshore acreage,” said Business Monitor International Ltd (BMI) Research.

The deal to create a company with $32 billion in annual revenue will combine GE’s strengths in making equipment long-prized by oil producers with Baker Hughes’s expertise in drilling and fracking new wells. GE will own 62.5 percent of the new publicly-traded company with BHI taking the remaining 37.5 percent stake, also with GE contributing $7.4 billion to fund a dividend for BHI shareholders.

The deal is expected to close in mid-2017. Lorenzo Simonelli, head of GE’s oil & gas business will lead the new entity, to be called “Baker Hughes, a GE company.”

GE is already the world’s largest oilfield equipment maker and it has invested heavily in large data processing services just as the oil industry eyes its potential to boost oil recovery. Baker Hughes, by contrast, is seen as one of the world leaders in horizontal drilling, chemicals used to frack and other services key to oil production.

The new company will vault Baker Hughes’s market share ahead of rival Halliburton Co, which tried and failed to buy Baker until the deal collapsed last May. GE and Baker Hughes will reach out to the Justice Department and European antitrust enforcers, according to a source close to the company. GE will argue to antitrust enforcers - who stopped the deal between Halliburton and Baker Hughes just months ago - that their deal is complementary, and that they are committed to any remedy needed to win approval, the source said, reported Reuters.

Merger complements, not substitutes

The melding of the two firms will significantly benefit both GE and BHI, producing a more efficient company that is significantly more integrated across the OFS supply chain. Though the deal is pending regulatory approval, it is likely to receive clearance given the limited amount of overlap between business units. With the exception of their Artificial Lift segments, the two companies are complementary, suggesting significant value creation via the new OFS entity. GE’s data capabilities will boost the efficacy of BHI’s top-tier equipment, enhancing their service offerings in a highly-competitive upstream market.

There is significant long-term opportunity in offshore given a continued focus on deepwater resources in a number of emerging and frontier markets. BHI’s offshore well construction, stimulation and intervention capabilities will complement GE’s well maintenance and control tools. This will allow the company to compete for share in West African and Latin American offshore markets including Brazil, Mexico and Nigeria, all of which we forecast will increase output over the next decade.

Gearing up for a new normal

Though oil prices will average higher as the market rebalances, OFS companies will remain under significant pressure to keep costs low. The forecast is a modest appreciation of oil & gas prices over the next decade, with crude expected to average below $70/bbl through 2020. This will encourage OFS providers to boost efficiencies and sharpen product offerings, thereby creating value for customers in a lower price environment, forecasted BMI Research. 

Also, the deal comes at a time when North American oil & gas producers are putting rigs back to work after a near-freeze in activity caused by a slump in oil prices that began mid-2014. But the deal is predicated on a forecast for oil prices to rise to $60 per barrel by 2019, GE chief executive Jeff Immelt told investors, reported Reuters.

Global oil prices have risen by a third this year to near $50 a barrel.

Baker CEO Martin Craighead, who will become vice chairman of the new company said, “We see growth in any market environment. Our customers continue to spend massive amounts of money.” The industry-wide push for pumping more oil and natural gas at cheaper costs should only accelerate that trend, he said.

Source: Company data

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