GE oilfield division, Baker Hughes plan to meld operations
NEW YORK — General Electric has agreed to combine its oil and gas business with Baker Hughes Inc., creating an industry giant with a broader suite of offerings amid the ongoing slump in crude prices.
The combination creates a major player in the oilfield services industry with the energy sector bogged down by weak and volatile commodity prices.
The new company will still be called Baker Hughes, but GE will own 62.5 percent of it.
Halliburton Co. attempted a buyout of Baker Hughes earlier this year, but it abandoned the $35 billion bid after U.S. antitrust regulators stepped in.
Baker Hughes is the smallest of the three international oilfield services companies, which contribute equipment and expertise to help oil and gas companies drill and keep wells running.
Baker Hughes has a market capitalization less than a third that of industry leader Schlumberger Ltd. By combining with GE, however, Baker Hughes’ annual estimated revenue will more than double to $32 billion, much closer to Schlumberger, which has annual revenue of $35.5 billion.
GE Chief Executive Officer Jeff Immelt said the tie up “accelerates our capability to extend the digital framework to the oil and gas industry.”
GE is likely to use the deal to promote wider adoption of its industrial Internet platform, said James West, an analyst with Evercore ISI. Perceived value in the oil business is shifting from hard assets such as wells to technology and data, he said.
And with immense pressure because of tumbling commodity prices, GE’s technology arsenal could be a highly valued commodity in and of itself.
Companies like Schlumberger, Halliburton and Baker Hughes are often among the first to feel the pinch of weak prices, as major oil companies pull back on capital spending or renegotiate contracts with them.
At least 100 North American oilfield service companies have gone bankrupt in 2015 and 2016 as energy prices have slid, according to a tally by law firm Haynes & Boone. Exploration customers were forced to cut an unprecedented amount of spending over the past two years to cope with the oil industry’s worst financial crisis in a generation.
After severe declines in the price of oil and gas during the recession, prices appeared to recover and stabilize, but with production charging forward, prices began to slump again in mid-2014. That has created new headwinds for Baker Hughes and its rivals.
Immelt told CNBC on Monday that the deal will help GE weather the oil slump, adding that “if pricing gets better, it allows us to benefit from that, as well.”
Because the deal is structured as a combination of two companies, it will cost GE far less — a $7.4 billion contribution plus its oil and gas business, with about $13 billion in sales — than an outright acquisition. Yet GE will still be able to capture more if commodities rebound.
The deal was unanimously endorsed by directors of both companies but needs the approval of Baker Hughes shareholders and regulators. Baker Hughes shareholders would get a one-time cash dividend of $17.50 per share and own 37.5 percent of the new company, with GE owning the rest. The companies expect to close the deal in mid-2017.
GE said the deal would add about 4 cents per share to GE earnings in 2018 and 8 cents per share by 2020.
Lorenzo Simonelli, president and CEO of GE’s oil and gas business, would become CEO of the new Baker Hughes, and Immelt would become chairman. Baker Hughes CEO Martin Craighead would be vice chairman. GE would pick five of the nine directors.
Cowen and Co. analyst Gautam Khanna said the companies fit well together strategically and that “we like the timing of the deal” during the trough of the oil industry cycle.
Shares of General Electric Co. fell 12 cents to close Monday at $29.10. Shares of Baker Hughes fell $3.72, or 6.3 percent, to $55.40.
Companies like Schlumberger, Halliburton and Baker Hughes are often among the first to feel the pinch of weak prices, as major oil companies pull back on capital spending or renegotiate contracts with them.