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Stuart Hampton

GE/Baker Hughes Deal Anticipates Higher Oil Prices

by Stuart Hampton | Dun & Bradstreet Editor

November 2, 2016 | No Comments »

Stock market experts will tell you that it is always best to buy when prices are low.

The same holds true for the oil market too.

Last week General Electric (GE) announced that it plans to merge its GE Oil & Gas oilfield services unit with and into Baker Hughes, betting that the combined company will be well positioned to take advantage of the industry’s anticipated rebound after a prolonged crude-oil price slump.

That extended slump has caused oil and gas drillers to cut back on drilling (to conserve capital) and subsequently on their demand for Baker Hughes’ oilfield services. Dealing with a string of quarterly losses, Baker Hughes has been seeking help to bolster its market position. In 2014 it agreed to merge with Halliburton, but federal antitrust regulators rejected that deal in May 2016.

Enter GE. Under the proposed merger deal, GE will take 62.5% of the combined company, which will continue to operate under the iconic Baker Hughes brand name. Among other things, Baker Hughes provides a regular Rig Count (a survey of  the number of active drilling rigs), which has been an oil industry standard since the 1940s.

Baker Hughes shareholders will own the balance of the company and will also receive a special $17.50-per-share dividend (a payout by GE to consummate the deal of $7.4 billion).

The combined company will have about $32 billion in revenues and have operations in some 120 countries.

GE expects that merging its oil services businesses with Baker Hughes will yield $1.6 billion in operating synergies by 2020 and accelerate its efforts to drive efficiency gains using a digital platform it has developed called Predix. The company expects Predix to become an industry standard.

The company believes the deal is realistic. It does not expect a return to the $100-a-barrel prices of 2013, but it is eyeing $60-a-barrel oil through 2019. That price level should get a lot of mothballed rigs back pumping again.

Directors of both companies have approved the deal. It is now awaiting approval by shareholders.

To help pay for this expansion and integration costs related to the merger, GE has also announced plans to sell GE Water for about $1 billion by mid-2017.

British editorial veteran Stuart Hampton has been covering oil and gas companies for Hoover’s since the Neogene-Quaternary period. Well, actually, since the early 1990s. For the best overview of the oil industry and its history he recommends Peter Doran’s “Breaking Rockefeller” and Daniel Yergin’s “The Prize.” You can also follow Stuart on Twitter.

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Photo courtesy of GE.

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