As some analysts have predicted, the continued market downturn is leading many oilfield service providers to think about merging their businesses. Historically, the oil and gas industry has witnessed merger and acquisition activity through various downcycles, as companies try to create value in volatile oil price environments.
A key example came of this trend came in late October, when GE and Baker Hughes entered into an agreement to combine GE Oil & Gas and Baker Hughes to create an equipment, technology, and services provider with $32 billion of combined revenue and operations in more than 120 countries.
The agreement has been approved by the boards of directors of both companies and the transaction is expected to close by mid-2017. The new company will combine the digital solutions, manufacturing expertise and technology from the GE Store and Baker Hughes’ standing in the oilfield services sector.
The companies claim that with a combined revenue of more than $32 billion (based on 2015 figures), the product portfolio of GE Oil & Gas and Baker Hughes in drilling, completions, production, and midstream/downstream equipment and services will create the second-largest company in the oilfield equipment and services industry.
The transaction will be executed using a partnership structure. GE Oil & Gas and Baker Hughes will each contribute their operating assets to a newly formed partnership. GE will have a 62.5% interest in this partnership and existing Baker Hughes shareholders will have a 37.5% interest through a newly NYSE-listed corporation.
A key part of this is the continued goal of improving and implementing the “digital oilfield,” and the related need to acquire “Big Data,” and to manage it. “Oil and gas customers demand more productive solutions,” said Jeff Immelt, chairman and CEO of GE. “This can only be achieved through technical innovation and service execution, the hallmarks of GE and Baker Hughes. As we go forward, this transaction accelerates our capability to extend the digital framework to the oil and gas industry. An oilfield service platform is essential to deliver digitally enabled offerings to our customers.”
Martin Craighead, chairman and CEO at Baker Hughes, said that the combination “brings together best-in-class oilfield equipment manufacturing and services, and digital technology offerings for the benefit of all customers and stakeholders. The combination of our complementary assets will create a platform capable of seamless integration while we enhance our ability to deliver optimized and integrated solutions and increase touch points with our customers.”
Much of the commentary on the deal has been focusing on how it could expand the use of Predix, GE’s software platform for the collection of data from industrial machines. GE reportedly plans to support the growing industrial internet of things with cloud servers and an app store. “We expect Predix to become an industry standard and synonymous with improved customer outcomes,” Immelt said.
Evercore’s James West affirmed that point. “We suspect this is likely an avenue for GE to promote the widespread adoption of its industrial internet platform Predix, a focal point of the company’s long-term strategy.” In fact, a GE-Baker Hughes partnership could be the key to accessing a plethora of data across the well life cycle for GE, “as its service offering is light relative to the two OFS companies,” West commented. As perceived value within the oil patch shifts from hard assets to the cloud, these type of combinations will likely become increasingly differentiating factors (if not necessary) to compete at the upper echelon of the next upcycle, West said.
However, the GE Oil & Gas/Baker Hughes merger “is of a different nature compared to what we have seen so far,” said Marina Ivanova of Douglas-Westwood. This merger, she said, “will create a fullstream offering, encompassing the entire lifecycle from exploration to downstream and power generation.”
As operators are struggling with increasing production costs, and the need for production optimization and improved operational efficiency is growing, “GE may be on to a winning diversification opportunity,” Ivanova said. If the merger is successful, she predicts that GE will improve its core capability through product and service bundling, “and thus create more value for its customers in a distressed oil price environment.” The transaction has potentially significant cost synergies, currently projected at $1.6 billion by 2020, according to GE. “But it remains to be seen where these cost savings will stem from,” Ivanova said.
Total global oilfield services (OFS) spending has been significantly impacted by the downturn, with expenditure falling 49% between 2014 and 2016, says Douglas-Westwood. Through to 2020, the firm expects that OFS spend will only recover to 69% of 2014 levels.
GE’s merger with Baker Hughes matches the rationale of other recent deals, including Schlumberger’s acquisition of Cameron and Technip’s merger with FMC. These transactions are likely to result in increased standardization of manufacturing practices and improved project efficiency for cash-constrained operators. But demand has to be sustained for fullstream offerings to be successful, Ivanova says. “Supply chain players who are using the market correction to diversify their offerings are likely to be better positioned for the coming recovery,” Ivanova noted. “However, the success of fullstream offerings will depend on companies’ tolerance towards risk and demand evolution in the transition period.”
