By: ProcurementIQ Analyst, Agiimaa Kruchkin
General Electric (GE) and Baker Hughes recently announced plans to combine GE’s Oil & Gas business with Baker Hughes’s. The partnership, expected to finalize during the middle of next year, would create the second largest oil field services company in the world and significantly alter the landscape of the oil field services and equipment (OFSE) market.
Beyond becoming one of the largest OFSE companies in the world, the combined business will flourish from the increased adoption of new technology and big-data capabilities. Ultimately, the presence in upstream, midstream and downstream oil markets will make the new business more resilient. As such, the partnership will fare better against market leader Schlumberger, intensifying competition in a variety of OFSE markets, including oil & gas well maintenance, downhole instrumentation and drilling rigs. Market consolidation will also increasingly drill into small and midsize oil and gas companies’ ability to remain competitive in the coming years.
Downturn in the Oil & Gas Market
As a result of the precipitous decline in crude oil prices since mid-2014, providers of OFSE are progressively turning to partnerships to streamline their operations and cut costs. Although Halliburton Company and Baker Hughes Inc. called off their merger in May 2016 due to opposition from antitrust regulators, the newly emerged partnership between GE and Baker Hughes is showing greater promise due to the minimal overlap between the companies.
Since mid-2014, crude oil prices have plunged on the back of oversupply due to the rising adoption of innovative extraction methods, such as hydraulic fracturing and directional drilling services. Weak prices have made oil and gas production uneconomical and devastated the sector, as evidenced by about 100 bankruptcies in North America between 2015 and 2016. In response to these challenges, market operators have had to readjust to lower oil prices and find ways to sustain output. Specifically, as price pressures persist, cost-cutting measures have been widely adopted by OFSE firms to remain afloat. As a result, over 350,000 jobs have been slashed by oil and gas companies worldwide. On a related note, GE is cutting over $1 billion in costs over the next two years.
Also among the coping mechanisms of the oil and gas downturn is M&A activity. For example, market leaders Schlumberger Ltd. and Technip S.A. have been buying small competitors to diversify their operations, expand their distribution channels and reduce their capital intensity. Similarly, GE has expanded its oil and gas business since 2007 through more than $14 billion in acquisitions. However, the company does not intend to stop there; GE executives believe that the oil market has bottomed and are, as a result, open to deals that could add $20 billion of new debt to support growth efforts. In a similar vein, the GE-Baker Hughes partnership has emerged.
The newly formed oil services powerhouse will help navigate the recent volatility that has characterized the OFSE market; even without a full takeover, this partnership will help distribute risk, share technology and improve sales. The key to its success lies in the complimentary nature of the two companies; while GE contributes its expertise in surface wellheads, subsea systems, turbines and measurement equipment and services, Baker Hughes’ portfolio boasts drilling services, well construction and reservoir analysis, among other solutions. This “new” Baker Hughes will employ 70,000 people and generate $32 billion in annual revenue.
Oil and gas prices are anticipated to rebound in the next three years on the back of stronger demand, resulting in a recovery of global oil and gas exploration activity. Simultaneously, rallying corporate profit will encourage oil and gas producers to satisfy their OFSE needs through purchases from vertically integrated market leaders. Diversified market players like the new Baker Hughes will reap the benefits from their partnership, as they will be better positioned to meet the rising demand for diverse oil and gas support services and equipment.