General Electric is taking advantage of a prolonged energy slump to become a bigger player in the oil and gas drilling business, a bet that could pay off big when prices recover.
GE and Baker Hughes Inc. will combine their oil and gas operations, creating a major player in the oilfield services industry with the energy sector bogged down now for years by weak and volatile commodity prices.
The new company will still be called Baker Hughes, but GE will own 62.5 percent of it.
Halliburton Co. attempted a buyout of its rival earlier this year, but abandoned the $35 billion bid after U.S. antitrust regulators stepped in.
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Baker Hughes is the smallest of the three international oilfield-services companies, which contribute equipment and expertise to help oil and gas companies drill and keep wells running.
By combining with GE, Baker Hughes Inc.’s annual estimated revenue will more than double to $32 billion, much closer to Schlumberger, which has annual revenue of $35.5 billion.
Baker Hughes has a market capitalization less than a third that of industry leader Schlumberger Ltd. By combining with GE, however, its annual estimated revenue will more than double to $32 billion, much closer to Schlumberger, which has annual revenue of $35.5 billion.
GE CEO Jeff Immelt said the tie up, “accelerates our capability to extend the digital framework to the oil and gas industry.”
GE is likely to use the deal to promote wider adoption of its industrial internet platform, said James West, an analyst with Evercore ISI. Perceived value in the oil business is shifting from hard assets like wells to technology and data, he said.
And with immense pressure due to tumbling commodity prices, GE’s technology arsenal could be a highly valued commodity in and of itself.
Companies like Schlumberger, Halliburton and Baker Hughes are often among the first to feel the pinch of weak prices, as major oil companies pull back on capital spending or renegotiate existing contracts with them.
After severe declines in the price of oil and gas during the recession, prices appeared to recover and stabilize, but with production charging forward, prices began to slump again in mid-2014. That has created new headwinds for Baker Hughes and its rivals.
Immelt told CNBC Monday that the deal will help GE weather the oil slump, and “if pricing gets better it allows us to benefit from that as well.”
Because the deal is structured as a combination of two companies, it will cost GE far less — a $7.4 billion contribution plus its oil and gas business, with about $13 billion in sales — than an outright acquisition. Yet GE will still be able to capture more the upside when commodities rebound.
The deal was unanimously endorsed by directors of both companies but needs the approval of Baker Hughes shareholders and regulators. Baker Hughes shareholders would get a one-time cash dividend of $17.50 per share and own 37.5 percent of the new company, with GE owning the rest. The companies expect to close the deal in mid-2017.
GE said the deal would add about 4 cents per share to GE earnings in 2018 and 8 cents per share by 2020.
Lorenzo Simonelli, president and CEO of GE’s oil and gas business, would become CEO of the new Baker Hughes and Immelt would become chairman. Baker Hughes CEO Martin Craighead would be vice chairman. GE would pick five of the nine directors.
Cowen and Co. analyst Gautam Khanna said the companies fit well together strategically, and “we like the timing of the deal” during the trough of the oil-industry cycle.