Baker Hughes must find new niche
Company faces navigating a changing industry, after $23 billion GE merger
The $23 billion merger of Houston energy services firm Baker Hughes with the oil and gas division of industrial giant General Electric closed Monday, creating the world’s secondlargest company of its kind and changing the trajectory of one of Houston’s biggest employers.
The merged company, which keeps the name Baker Hughes, faces the tasks of integrating the two companies, carrying out cost and job cuts — including some in Houston — and distinguishing itself from its top competitors, Houston’s Halliburton and global leader Schlumberger. The company also must navigate a changed oil and gas industry, one that is leaner and demanding ever greater efficiency from its contractors following the 3-year-old crash in oil prices.
“When we decided to complete this merger, it was really to create a transformation in the industry,” said Lorenzo Simonelli, the new chief executive of Baker Hughes and former chief of GE Oil & Gas. “Everybody is committed to the oil and gas industry being a major part of the portfolio
of GE.”
The combination joins Baker Hughes’ oil field expertise with GE’s industrial computing power, giving the company capacity to expand into all parts of the oil and gas business, from the wellhead to the pipeline to the refinery — and even into power generation.
It also alters the path of a pillar of Houston society, a company known for drill bit innovations, quiet corporate philanthropy and an army of roughnecks who dotted the oil patch in coveralls — always royal blue, never Halliburton red.
Long history in Houston
Baker Hughes traces its roots to two oil field inventors, one in California and one in Houston, each who started companies more than 100 years ago.
In 1907, California wildcatter R.C. Baker invented a tool that revolutionized cable-tool drilling, a method of crushing rock by repeatedly dropping a bit suspended from a steel cable into the bottom of a hole. A year later, Howard Hughes Sr., a Harvardeducated lawyer who gave up law to drill for oil, helped build the first modern-day steel drill bit to grind through hard Texas rock. The two firms, Baker International and Hughes Tool Co., merged in 1987, following the devastating oil bust of the ’80s.
The GE merger will double Baker Hughes’ size, to nearly 70,000 employees in 120 countries. The company will have dual headquarters in Houston and London, which was the home of GE Oil & Gas. But Simonelli reiterated his commitment to Houston, pledging to keep a residence here, and be a “hands-on” boss.
Still, he acknowledged Houston will almost certainly lose some employees over the next few years. The company aims to cut at least $1.2 billion out of its combined expenses by 2020, including the closure of some of the 40 facilities here in Houston.
“Is there people impact?” Simonelli said. “Yes.”
The details of combining the two organizations, as well as layoffs and other cost-cutting measures, are still getting worked out, executives said. But the merger should help both GE, which has tried with mixed success to expand its oil and gas footprint, and Baker Hughes, which was left diminished by the oil bust and a failed merger with Halliburton, analysts said.
GE spent nearly a decade rebuilding its oil and gas division, largely through acquisitions. It first beefed up its deep-water business, spending 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 kicked in.
Baker Hughes, meanwhile, struggled through the downturn, which sent prices from more than $100 per barrel in 2014 to $26 last year. The company’s revenue fell by almost $15 billion, or 60 percent, during the crash, from $24.5 billion in 2014 to $9.8 billion last year. Baker Hughes posted losses of more than $2.7 billion last year.
The merger agreement with Halliburton tied the company’s hands during the downturn, leaving it unable to take steps, such as selling certain businesses, that might have left it better positioned for the recovery. Ultimately, that merger — scuttled last year after the U.S. Justice Department sued to block the deal — weakened Baker Hughes, despite Halliburton’s $3.5 billion breakup payment.
Late last year, the company spun off its hydraulic fracturing fleet into a new company, BJ Services, of which it still holds a minority stake. Analysts took that move as a sign Baker Hughes was getting out of the fracking business, which dominates North American oil production.
GE’s edge in data collection
But analysts said the new company can excel in other sectors of the competitive services market and bring the efficiencies that production companies increasingly demand. For example, GE’s expertise in data collection and analysis could tell oil and gas companies when to replace parts — before they break down — and how best to stimulate production in old wells.
“There’s a lot of big-data solutions they’re able to provide to the oil and gas sector that haven’t been tapped yet,” said Jonathan Garrett, an analyst at energy research firm Wood Mackenzie.
GE, with an oil and gas computing platform called Predix, and revenue of $123.7 billion in 2016, will add resources to a company that had become a distant No. 3 in the sector, behind Halliburton and global energy services leader Schlumberger. The new Baker Hughes, however, has leapfrogged Halliburton and trails only Schlumberger in revenue and head count.
“They were being overwhelmed in a low oil-price environment compared to Schlumberger and Halliburton,” said Brian Youngberg, an analyst at Edward Jones in St. Louis. “They almost had to do something.”
GE owns nearly two-thirds of the company. Retiring GE chief executive Jeffrey Immelt becomes chairman of the new Baker Hughes. Martin Craighead, former chairman and CEO at the old Baker Hughes, becomes vice chairman. The board named Simonelli the new company’s president and CEO.
Baker Hughes shareholders overwhelmingly approved the deal on Friday, after the merger secured approvals from the European Union in May and the U.S. Justice Department last month. Trading on the new firm, formally called Baker Hughes, a GE company, starts Wednesday on the New York Stock Exchange under the ticker BHGE.