July 3, 2017
General Electric Co.’s new oilfield services behemoth is poised to capitalize on a recovery from the worst crude crash in a generation — except no one is sure when that will actually happen.
The merger of GE’s oil and gas business with Baker Hughes Inc. officially closed Monday, creating a provider of services and equipment that’s second in size only to Schlumberger Ltd. While Lorenzo Simonelli, the GE oil executive who will lead the new Baker Hughes, says his company carries built-in advantages over its rivals, the launch comes at a time of growing risks and uncertainty in the oil market at large.
Shale explorers have been leading a fresh drilling boom, boosting budgets 10 times faster in the U.S. than the rest of the world. Whether that growth continues, though, is far from certain. After almost six months of growth, the number of rigs targeting oil fell last week and production declined. That hints at growing caution among producers for next year.
“I think they need a little more time over the course of this year to make those decisions,” Simonelli said in an interview Friday ahead of finalizing the merger Monday. Likewise, he’s not ready to make any new predictions on the profit outlook for his company in 2018. “It’s a little early to say.”
The new company begins trading under the ticker BHGE on Wednesday. Simonelli said his initial focus is on how he can reap the most savings as he stitches together the two businesses without sacrificing market share. To do that, he’s touting how the merger brings together strengths that can’t be matched by competitors such as Halliburton Co., Schlumberger or Weatherford International Plc.
“I think we’re number one,” Simonelli said shortly after a shareholder meeting where 99 percent of votes cast were in favor of the deal. “When you look at the people we play against — a Schlumberger, a Halliburton, a Weatherford — they don’t have the same portfolio that we do.”
After oil prices hit bottom at $26.05 a barrel in February 2016, a short-lived rally earlier this year fizzled on worries that a global glut wasn’t getting any better. Oil fell briefly into a bear market last month, and now is trading around $46 a barrel.
Oil service companies, which were hit first and worst by the oil crash, have been slow to benefit from the past year’s drilling renaissance. GE’s reconstituted Baker Hughes was forecast by executives to have 2018 earnings before interest, taxes, depreciation and amortization of $5.5 billion. Yet analysts including J. David Anderson at Barclays are now predicting it will be a billion less.
Tudor Pickering Holt & Co. recently downgraded Baker Hughes to a hold rating until some of the clouds clear. “We like the pro forma business, but wrestle with 2018 growth prospects,” analysts at the Houston bank wrote June 23 in a note to investors.
Simonelli is counting on more predictable income such as equipment maintenance contracts around the world to help compensate for the ups and downs of the U.S. drilling outlook.
“It provides more continuity and stability in the earnings and less volatility,” Simonelli said.
GE owns 62.5 percent of the new Baker Hughes. In the past, the oil business has been a drag on earnings for the Boston-based industrial giant, frustrating investors who bemoaned GE’s terrible timing in building up the business ahead of the 2014 market crash. The merger creates a stronger company that should turn that around, Simonelli said.
In turn, GE’s financial discipline may help smooth out some of the quarterly earnings misses Baker Hughes has reported in the past, Brian Youngberg, an analyst at Edward Jones, said in a phone interview.
“GE will run a pretty tight ship as majority owner,” Youngberg said. “They’ll probably bring some of that GE discipline to Baker Hughes.”