Baker Hughes-GE deal shakes up the oil patch
$32 billion merger would create a giant in energy services
Six months after its acquisition by Halliburton collapsed, Baker Hughes is combining with a unit of General Electric in a $32 billion deal that would leave an expanded Baker Hughes with more revenues and employees than its Houston rival and reshape the energy services industry.
The merger with GE Oil & Gas would create a new company that would keep the Baker Hughes name but add the backing of one the world’s biggest industrial companies, providing a formidable challenger to Schlumberger, the world’s leading energy services company.
Analysts said the merger, if it gains regulatory approval, would combine companies with different areas of strength, allowing it to compete on both onshore shale fields and deepwater drilling rigs, and harness GE’s expertise in collecting and analyzing massive
amounts of data from industrial operations.
The deal would combine two companies with histories of technological achievement, one founded by Howard Hughes and the other by Thomas Edison. Exec-
utives from the two companies envision one-stop shop for oil and gas producers with the ability to digitize the oil patch and introduce predictive data that could mean less downtime and lower costs for drillers.
“It’s a powerful deal and it’s transformational for the industry,” said James West, an analyst at investment bank Evercore-ISI.
A rapid comeback
Until Monday’s merger announcement, Baker Hughes, the world’s third largest oil field services company, was slashing jobs, narrowing its focus and concentrating on equipment sales and niche businesses as it worked to recover from the worst oil bust in 30 years and the failed attempt to combine with Halliburton, the second largest services company.
Just last week, Baker Hughes reported that it lost more than $400 million and slashed another 2,000 jobs, while both Schlumberger and Halliburton reported small profits and the end to their layoffs. The new deal would more than double Baker Hughes’ employee count to about 70,000, compared to about 50,000 at Halliburton and 100,000 at Schlumberger.
Jeffrey Immelt, GE’s chief executive, would become chairman of the new Baker Hughes, and Martin Craighead, Baker Hughes’ CEO, would become vice chairman. GE Oil & Gas chief executive Lorenzo Simonelli would take over as the new Baker CEO.
The company would have dual headquarters in Houston and London, where Simonelli is based. Simonelli, however, emphasized the importance of Houston as the “jewel headquarters” and stressed that additional job cuts would be limited here. The merger promises $1.2 billion in savings by 2020.
“Houston is a huge center for the oil and gas industry,” Simonelli said, “and we plan to retain our capabilities here.”
GE, based in Boston, would own 62.5 percent of the combined company, which will continue to trade under Baker Hughes’ BHI stock ticker. Baker investors, who will own the remaining 37.5 percent, will get a one-time cash dividend of $17.50 a share, with GE contributing $7.4 billion in cash toward the dividend. The deal is expected to close in mid2017.
Baker Hughes shares fell $3.72 cents, or 6 percent, to $55.40, after surging on speculation of a deal late last week. GE’s stock price closed Monday at $29.10 per share, down 12 cents on the day.
Thanks to Halliburton
The nearly $35 billion Halliburton deal, which was opposed by federal antitrust regulators, dragged on for about 18 months before it collapsed on May 1.
During those many months, GE emerged as the strongest potential buyer to acquire Baker Hughes assets that Halliburton would need to sell in order to appease regulators.
GE was evaluating the businesses set to be spun off so when the deal fell apart, Simonelli said, he quickly contacted Craighead on collaborating and forming partnerships around the development of new technologies. “Once that (Halliburton) transaction didn’t take place, I seized the opportunity to really connect with Martin,” Simonelli said.
Those technology partnership talks evolved into merger discussions that began to peak in late September when their teams met in New York, said Craighead, who came away impressed by GE’s innovative culture and talent. “For me, that was the tipping point that there was a deal to be done here,” he said.
Since GE’s and Baker Hughes’ businesses appear to show little overlap, the proposed merger may have an easier time with antitrust regulators than the proposed Halliburton-Baker Hughes deal. The only segment of their businesses that might run into regulatory scrutiny is Baker’s and GE’s combined strengths in artificial lift, the business of drawing oil and gas from wells long after they’re drilled and completed.
“It’s not without risk, but I’d say it’s very limited and highly manageable,” Craighead said. “So we’re comfortable with that road ahead.”
While Baker Hughes negotiated and received an enlarged 10 percent, or $3.5 billion breakup fee from Halliburton, the termination penalty with GE is $1.3 billion — a much smaller “industry standard” 5 percent of the total deal.
Simonelli said the companies are an “exceptional cultural fit” with GE able to offer technology from other divisions like power and aviation. For example, GE can provide the electricity to power oil fields in remote areas while also serving pipelines, refineries and other energy facilities.
For nearly a decade, GE built its oil and gas division through acquisitions, first beefing up its deepwater business through deals of more than $1 billion for Houston-based Hydril and Vetco Gray, as well as U.K.-based Wellstream. It bought into the onshore shale boom by acquiring Lufkin Industries for $3.3 billion just a year before the oil bust.
The Lufkin deal was considered a disappointment given the timing, while the deepwater sector remains mired in a slump that’s expected to continue at least well into 2017.
Selling part of business
Baker Hughes has cut its workforce by 28,000 jobs, or 45 percent in less than two years during the oil bust. As part of its strategy to focus on strengths, Baker Hughes plans to sell a majority of its pressure pumping business, which includes hydraulic fracturing, or fracking, an area that has been dominated by Halliburton in North America.
Even though the industry is still down, just coming off the bottom of the oil bust, it could be a good time for the merger, said Byron Pope, an energy analyst at Houston investment bank Tudor, Pickering, Holt & Co.
“This is fantastic timing,” Pope said. “History suggests the best time to invest in oil services is when you’re convinced we’re at the cyclical trough.”