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November 2016

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Editorial comment

Changes are afoot once more in the oilfield services market; GE has announced that it plans to merge with Baker Hughes. Unlike the ill-fated US$28 billion deal between Baker Hughes and Halliburton, which was finally scrapped earlier this year after falling foul of antitrust regulators, there appear to be no such obstacles this time around.

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According to the Wall Street Journal, the deal will result in the creation of a new company in the oilfield services sector (one with revenues of more than US$32 billion) and will put GE in prime position to benefit from any future industry recovery. As part of the merger, GE is to provide its oil and gas business along with US$7.4 billion through a cash dividend of US$17.50 per Baker Hughes share. The new company will be 62.5% owned by GE, with the remaining 37.5% being owned by Baker Hughes shareholders.1

This may sound like a good deal for Baker Hughes, but the other big players in the oilfield services sector are likely to be less keen on the idea. According to Liam Denning, writing for Bloomberg, the overlap in service offerings meant that the Halliburton-Baker Hughes deal was expected to result in a shedding of business lines from both companies in order to appease antitrust authorities. These divested assets would have been easy pickings for other players in the market, such as Weatherford.2 This new deal is rather different, as the only significant service overlap between GE and Baker Hughes is in artificial lift, and even there the two companies focus on different technologies. To top it all off, the Halliburton deal would have meant a major player leaving the market, whereas the GE merger looks set to produce an integrated services company well-suited to bidding on projects in a low oil price environment.3

However, the merger still has to meet regulatory approval and as the failure of the deal with Halliburton shows, that’s far from certain just yet.

For further evidence that nothing is ever guaranteed, just take a look at the oil price: as I write this, Brent crude is back down to just above US$47/bbl. The rally that followed OPEC’s unexpected announcement that it would be seeking production cuts of roughly 700 000 bpd has ended.

Unsurprisingly, this appears to be mostly due to OPEC agreeing that production cuts were a good idea, but not getting so far as to agree who would actually do the cutting. Analysts for Goldman Sachs were quoted as saying, “The lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on 30 November.”4 These same analysts also predict that oil will be headed back down to the low US$40s if OPEC fails to reach an agreement.

As you might expect, OPEC Secretary General Mohammed Barkindo has a rather more positive outlook, stating that “Come 30 November, we are optimistic that we are going to get the required supply cut that will go a long way in rebalancing this market” and that he’s “confident that our non-OPEC friends will also contribute.”5 Let’s hope he’s right.

References

  1. ‘GE to Combine Oil and Gas Business With Baker Hughes’ - http://www.wsj.com/articles/ge-to-combine-oil-and-gas-business-with-baker-hughes-1477908407
  2. ‘GE and Baker Hughes Leave One Company Heartbroken’ - https://www.bloomberg.com/gadfly/articles/2016-10-31/ge-and-baker-hughes-leave-weatherford-heartbroken
  3. Ibid.
  4. ‘Oil’s Heading to $40 If OPEC Fails, Says Goldman’ - http://www.bloomberg.com/news/articles/2016-11-01/goldman-sees-oil-in-low-40s-if-opec-deal-fails-as-odds-diminish
  5. ‘OPEC Chief Says Oil Producers On Course to Deliver Supply Deal’ - http://www.bloomberg.com/news/articles/2016-10-31/opec-chief-says-producers-on-course-for-supply-deal-next-month

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