General Electric Co. (GE) may want to sell Baker Hughes, after only four months of having completed the acquisition that had positioned Baker Hughes as the world’s second largest oilfield service company in revenue terms.
The Baker Hughes deal gave GE access to that company’s high-tech pumps used in oil wells and other innovative products; but before GE took over, Baker had already sold its assets (BJ Services) for onshore fracking and North American cementing. Baker Hughes had sold a majority stake in its North American frack fleet and cementing business to private equity funds, establishing a joint venture that would operate under the 144-year-old BJ Services brand. The new BJ is not publicly traded.
A year ago, the divestiture of BJ made Baker a more attractive target for GE. But today the move doesn’t look so wise considering the resurgence of North American shale. Perhaps this is why GE CFO Jamie Miller told reporters and financial analysts this week that GE seeks “exit optionality.” (That is, GE might want to divorce Baker Hughes.) Bloomberg reported that GE distributed a 57-page strategy presentation to analysts and investors this week that asserts Baker’s old-fashioned reliance on volatile commodity cycles, and the near-term improbability of any meaningful recovery in demand for its services, is cramping GE’s style.
GE had acquired Baker Hughes on the expectation that the oil price would exceed $60 a barrel by 2019. That now may be less likely — though who really knows? Commodity based businesses have peak highs but also peak lows and transnational publicly traded companies are committed to delivering value to shareholders on a quarter by quarter basis. Short-term profits have now swung back in the direction of North American shale. In its annual energy forecast, The International Energy Agency reported that it expects the U.S. to account for 80 percent of the increase in global oil supply to 2025 and that this rise in U.S. production will be driven by increases in production of shale oil. The U.S., previously an oil and gas importer is now the “undisputed global oil and gas leader”, according to the IEA.
Bloomberg quoted Flannery as saying the following with respect to the Baker Hughes acquisition: “The core conception of the deal is this was a stronger asset combined than we had on our own and it created an optionality in terms of a listed company where we could go. The transaction was contemplating something like this at the outset, as one of the options for the company.” Flannery had inherited the Baker Hughes relationship when he succeeded Jeff Immelt in August.
In other words, GE may yet get out of the deal. It’s purchase of Baker Hughes gave GE access to Baker’s high-tech pumps used in oil wells and other innovative technologies and products. But Baker’s decision to prepare itself for marriage by shedding its North American frack fleets and cementing operations may have been short sighted. At this week’s meeting with analysts, GE CEO Flannery announced plans to