Size matters: inside the General Electric-Baker Hughes merger
The merger deal between General Electric’s oil and gas business and Baker Hughes will, subject to ratification, create a $32bn oilfield services giant ready to compete with industry leader Schlumberger. Julian Turner explores potential opportunities for both players in oilfield technology and analytics.
Like a gambler guarding his chips during a protracted losing streak, the oil and gas industry must decide whether to twist or stick when it comes to investing billions in long-term E&P projects.
US company General Electric (GE) laid its cards emphatically on the table in November by merging its petroleum-related operations with Baker Hughes, creating a $32bn oilfield services giant to rival industry leader Schlumberger − and betting on an industry rebound from historically low oil prices.
The deal, subject to approval by regulators and Baker Hughes shareholders , represents a resounding vote of confidence in the offshore industry at a time when multinationals such as Shell, Statoil, BP and ConocoPhillips have reported steep drops in earnings, asset sales and cost-cutting measures.
Bloomberg reports that oilfield service companies have suffered disproportionately compared with the rest of the hydrocarbon supply chain, contributing the largest chunk of the more than 350,000 jobs lost globally. At least 100 US oilfield service companies went bankrupt during 2015 and 2016.
GE had been wanting to expand its footprint in oil and gas for a while and when Halliburton’s bid for Baker Hughes fell foul of the US Justice Department in May, GE leapt at the chance to snap up what is now a leaner, more tech-savvy company with proven expertise in digital technology and analytics.
“It has always been our belief that the oil and gas industry would be an early adopter of analytics,” GE chief executive Jeffrey Immelt told analysts and investors recently. “It was this notion that the industry was going to become more technically sophisticated as time went on. Customers were going to demand broader solutions. That’s what we’ve been betting on all along.”
The industrial internet: merger will create technology powerhouse
Immelt also pointed to growth opportunities for the new GE-Baker Hughes entity through increased adoption of leading-edge technology such as GE’s industrial cloud-based platform (PaaS) Predix.
Predix uses the concept of the Internet of Things (IoT) to optimise and interconnect every facet of oil and gas operations, from wellhead sensors to back-office operations, as well as reduce downtime, maximise the value gained from CAPEX and OPEX, and improve both process and personnel safety.
Technology synergies also extend to Big Data and cloud systems that are able to harness, analyse and disseminate vast swathes of oil field data, allowing upstream operators to slash drilling costs and boost productivity from deep and ultra-deepwater wells over a mile (5,000ft) below the surface.
Baker Hughes will also be able to leverage GE's Industrial Performance & Reliability Center, which monitors thousands of key assets each day across the oil and gas, mining and power sectors.
GE estimates that an out-of-commission offshore well costs operators $3m per week in lost revenue and that the average world oil recovery rate is just 35%. Just a 1% improvement equals about three years of global oil production. Now consider that across the industry reliability ranges from 70-90%, leaving room for considerable efficiency and productivity gains, increasingly from digital technology.
Baker Hughes already operates 15 technology centres worldwide including the company’s flagship facility, the $42m Baker Hughes Center for Technology Innovation, in Houston, Texas, US.
Together, the R&D centres cover the gamut of oilfield services technologies including drill systems testing and optimisation, telemetry, logging while digging, wireline well logging, reservoir characterisation, and mud systems and fluids for high pressure, high temperature wells.
Bloomberg also notes that GE itself is transforming into more of a startup culture, citing as evidence its recent move to Boston, home to digital entrepreneurism and disruptive technology in the US.
Partnership strategy: GE-Baker Hughes deal part of wider industry trend
The GE-Baker Hughes deal is indicative of an industry trend that is seeing oilfield contractors forming partnerships to help cut costs and expand their offerings and distribution channels amid the slump.
In an industry where size increasingly matters, the GE-Baker Hughes merger will create a company capable of providing end-to-end oilfield equipment, technology and services solutions at scale as well as one better able to trade from a position of strength in the ongoing low oil price environment.
Bloomberg reports that GE has expanded its oil and gas business in recent years through more than $10bn in acquisitions, yet within the world of oilfield services and equipment manufacturing, the iconic company ranked 11th, according to data published in April 2016 by Spears & Associates.
In addition to the Baker Hughes partnership, GE has also inked a commercial deal with equipment provider National Oilwell Varco for floating production storage and offloading vessels.
In May 2016, at around the time the Halliburton-Baker Hughes deal fell through, Houston-based FMC Technologies and French oil-services rival Technip agreed to merge to form a new company valued at around $13bn and with a combined revenue in 2015 of $20bn, more than Baker Hughes.
Not to be outdone, oil services industry leader Schlumberger purchased Cameron International, the leading supplier of flow equipment products, systems and services, in April for a reported $14.8bn.
Antitrust issues: will regulators approve the GE-Baker Hughes deal?
Analysts are divided as to whether the GE-Baker Hughes deal stands a better chance of approval from US lawmakers than the proposed Halliburton deal, which was spiked by anti-trust regulators.
“The companies have far fewer overlaps and are primarily complementary,” said Bloomberg Intelligence analyst Jennifer Rie. “The deal would create a stronger player in a concentrated industry, which is pro-competitive and has a better chance of clearance than the failed Halliburton deal.”
Energy analyst Clair Poole is less sanguine. Writing for Forbes, she cites RBC Capital Markets analyst Kurt Hallead, who notes that Baker Hughes is the second largest player in artificial lifts, which boost the flow of crude oil by pumping or injecting gas into wells, while GE Oil & Gas is the fourth largest.
Combined, the two companies would command an estimated third of the market, which could earn them scrutiny from the US Government. The two firms also overlap modestly in wireline technology, which allows oil and gas operators to visualise well data, plan safe operations and boost efficiency.
If approved, the GE-Baker Hughes merger will create a lean, mean oilfield services company to rival Schlumberger and Halliburton − one that has at its disposal the very latest digital technology − and could pave the way for similar mega-deals as companies pool resources to see out the downturn.
For GE CEO Jeff Immelt, that constitutes, not a gamble, but rather a good piece of business. “This is the right time in the cycle to invest,” he said. “This was a unique opportunity. We wanted to grab it.”