Bakersfield headquarters of Baker Hughes
Headquarters of Baker Hughes in Kern County, San Joaquin Valley, California. Photograph by Citizens of the Planet — Education Images/UIG

What the GE-Baker Hughes Deal Says About the Energy Sector

Nov 01, 2016

General Electric's deal with Baker Hughes to create the world's No. 2 oilfield services business is the clearest signal yet that consolidation is picking up in the energy sector as companies face long-term lower oil prices.

GE (ge) said on Monday it would merge its oil and gas business with Baker Hughes (bhi), creating a company with $32 billion in annual revenue and leapfrogging Halliburton (hal) to be second globally behind Schlumberger AG (slb).

"The transaction assumes a slow recovery (in oil prices), really $45 to $60 per barrel through 2019, and this seems reasonable," GE Chief Executive Jeff Immelt said on a call with investors and analysts on Monday.

Since crude oil prices plunged in 2014 in the face of oversupply, deal s have been fitful, with large players such as Schlumberger and Technip buying smaller rivals.

But size of the GE-Baker Hughes tie-up and its timing amid a recent spate of deal s have led advisers and industry analysts to think companies have readjusted to lower oil prices in their strategies and the tide is turning. U.S. producers have also found ways to sustain output even at lower prices.

"Industry protagonists are much more cautious about the slope and length of runway for the industry recovery going forward, so you've seen a series of combinations which have sought scale," said William Herbert, head of global energy research at Simmons & Co International, a unit of Piper Jaffray.

Halliburton, which tried to buy Baker Hughes over a year ago but was blocked by regulators, has embarked on steep cost cuts as it expects price pressures to continue. It said earlier this month that oil prices would have to stabilize above current levels of $50 per barrel for producers to make any meaningful boost to oilfield plans.

BACKLOG OF POSSIBLE DEAL S

Halliburton is unlikely to try another big acquisition despite being relegated to third place by Monday's deal , people familiar with the company said. It lacks vertical integration in subsea drilling but otherwise has the global scale needed to compete, industry analysts said.

Doug Getten, a Houston-based partner in the corporate practice at law firm Paul Hastings, said the recent flurry of deal s shows parties are able to reach consensus on the outlook for prices.

"Part of this consensus on pricing is not everybody sitting around the table smoking cigars saying oil is going back to $80, $90, $100," said Getten.

Companies striking deal s recently have included pipeline operators American Midstream Partners, which announced plans to buy JP Energy Partners last week, and refiners like HollyFrontier Corp, which agreed to buy a Suncor Inc division on Monday. In the exploration and production segment, buyers have been targeting companies with premium acreage in the Delaware and Permian basins in Texas.

"There is a material backlog of transactions that people have been looking to do on the M&A side, and it seems like we are primed to see a return to normalcy in the energy M&A transactions," Getten said.

In addition, the solidification of the three global giants in oilfield services poses a question of how smaller companies will compete.

Weatherford, for example, long a speculated takeover target, will be a distant No. 4 to Baker Hughes , Halliburton and Schlumberger.

The drag on deal -making could come from the banks that help finance and advise on transactions, however.

"The time is right for firms to consider mergers and acquisitions. The banks may be more conservative until there's more long-term visibility of where the commodity prices go," said David Otte, a special adviser to Spears and Associates, a Dallas-based consultancy.

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