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October 12, 2017 02:00 AM

GE, Baker Hughes join to face market downturn

Kyle Brown
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    HOUSTON—GE merged its oil and gas business with Baker Hughes Inc. to build a company strong enough to weather a tough oil and gas market.

    Baker Hughes, a GE company—with the operation known as BHGE—brings together about 70,000 employees and a line of products and services for a full-stream offering for the market, according to a company spokeswoman with BHGE. The deal was announced in October 2016 and completed this past July. Financial details were not disclosed.

    "It's covering that entire value chain from end to end, which is a unique offering for us," the spokeswoman said. "Because these companies are so complementary, I think that shows the portfolio merging together nicely."

    In the upstream space, the company covers evaluation, drilling, completion and production. Midstream offerings include liquefied natural gas and pipeline and storage. Downstream, BHGE covers refining and petrochemical, and fertilizer, according to the spokeswoman.

    On top of that is an industrial operating platform called Predict, which allows access to data picked up by sensors in an application, as well as applications that analyze the data collected. BHGE also has access to the "GE Store" of knowledge, experience and research, "which is the ability to accelerate and learn from the other individuals at GE," to innovate and bring new products to market faster, the spokeswoman said.

    The acquisition creates a business with about 70,000 employees with operations in more than 120 countries, and dual headquarters—one in Houston and the other in London. It includes four product companies: Oilfield Services, Oilfield Equipment, Turbomachinery and Process Solutions, and Digital Solutions, as well as 24 product lines and segments. As the integration teams continue to work together, they'll be looking for about $1.6 billion in cost synergies during the next three years, the spokeswoman said.

    "Now that the teams are coming together and business plans are in place, I think we're going to be in a better place to evaluate that. It's not going to be an easy process," she said.

    Part of the integration includes looking at combined operations, including rooftop consolidation.

    "We don't need to have duplicative plants in the same places, and we have about 40 rooftops in Houston alone, for example," she said.

    Studying those numbers in some cases could mean hiring, and in others, it could mean consolidation, the spokeswoman said. In some cases, such as BHGE's July groundbreaking in Cincinnati to build a new 26,000-sq.-ft. data center starting with 15 employees, it means expansion. Specific plans for other facility or employee changes were not disclosed.

    "When you have two such massive companies and an employee population of 70,000, we want to be strategic and thoughtful about those decisions," she said. "For the employee side, certainly we want them to know that we're giving it proper thought. We're looking at how the teams are coming together. We're looking at business plans and operating plans."

    BHGE also will look for about $400 million in revenue synergies in the same three-year period. Combined revenue for the company will be about $23 billion, based on 2016 combined sales. It also will be looking for sourcing benefits that are available to the combined company.

    "There's a lot of sourcing advantages you can get with the strength of the full GE system, and we can certainly get some great cost advantages as a result, given all of our other industrials," the spokeswoman said.

    Those synergies are part of the company's efforts to build a more stable position for the current volatile market, according to Lorenzo Simonelli, president and CEO of BHGE.

    "Disruptive change is the oil and gas industry's new normal. We created BHGE because oil and gas customers need to withstand volatility, work smarter and bring energy to more people," he said.

    The oil and gas market has seen a challenging few years, the spokeswoman said, and that volatility is part of what brought the two companies together in the first place.

    "We're convinced that this offering gives us a competitive advantage in the space, and certainly that means, in the long term, we're hoping that positions us to weather volatility better," she said.

    Unsteady margins

    In 2016, Baker Hughes looked to be moving toward a $28 billion merger with Halliburton Co., but the deal fell apart because of issues with antitrust regulations. Moving from partnering with Halliburton to GE "makes perfect sense," said Neil Mendes, CEO of Alpine Polytech, a Texas-based company specializing in polymer technologies for the energy industry.

    "With the downturn in the market, and that Baker had underperformed on a shareholder basis," he said, "both companies really hadn't killed it, so it made sense they would come together. That's why it went so smoothly."

    Baker Hughes' weekly North American Rotary Rig Count—statistics the firm has reported since 1944—has continued to show improvement in the number of operational rigs. Currently, the rig total is 936, an 85 percent increase over the total from this point last year at 430.

    Continued depressed oil prices make it even more imperative that a leader for oil and gas companies offer value, where tight margins will make the difference for a company, Mendes said.

    "We're in a world of $50 oil on a good day," he said. "At $50 a barrel, you have to be very good at your job to make money. At $70 to $100, there's so much money out there, you can be not very good and be reasonably successful. But at $50, you've got to have tools that work very well and are very reliable."

    GE has worked its way into the oil and gas market after purchasing Vetco Gray Inc., in 2007 for $1.9 billion and Hydril Pressure & Control in 2008 for $1.12 billion, bringing a more corporate feel to the market, Mendes said.

    Baker, on the other hand, had a more "customer-intimate" strategy, with good products and a long-term standing relationship in the oil and gas industry, he said.

    People in the industry are waiting to see how the acquisition will play out, Mendes said.

    "GE is obviously a global brand outside the oil and gas business, and their reputation of acquiring someone and turning them into a GE satellite raises eyebrows anytime GE comes in," he said. "They left the Baker name up front … Baker's got a very good brand, and their completion tools and drilling and evaluation tools are outstanding, so they compete very well on capability in the marketplace."

    Mendes sees the match as bringing together two companies with complementary strengths.

    "The ability of GE to take some of the things that it does really well and incorporate that technology into these tools and operating system, I think it can really behoove Baker," he said. "I think the combination of what Baker has and GE has can really mesh together.

    "I think like over the last few years, GE has really softened their approach in the oil and gas business and tried to be more customer-centric, and Baker has tried to become more business-centric."

    For Aliene Elkins, business development manager of Sabic Innovative Plastics LNP, which provides compounding effects for manufacturing applications, the acquisition will be a benefit for the wider industry, she said.

    "The research and technology that Baker Hughes has is going to be a great contribution to any company," she said. "When you combine the two of them, you get a better package."

    The only cultural issue she is concerned about is the possibility that GE could shift Baker Hughes away from research and development, she said.

    "The world looks to Houston for technology in the oilfield," she said. "I hope they continue to allow that research and development team to work as they have, to allow both groups to prosper. Moving the technology forward will benefit the entire industry."

    Combining cultures

    Finding a way to bring together both companies' cultures to work in harmony took effort from the start of the acquisition, said Uwem Ukpong, chief integration officer for BHGE.

    "We took culture seriously from the very beginning of integration planning—focusing on the culture from the first joint meeting," he said. "We have established BHGE cultural focus areas and are building out a robust program to embed these and drive the right behaviors with our leaders in a way that is effective with the employees from the grassroots globally."

    The combined goal is to bring both companies together quickly to develop long-term value for stakeholders, Simonelli said.

    "BHGE has proven technologies and experience with the spirit of a startup, and our leadership team looks forward to quickly demonstrating the strengths of the new company," he said.

    Alongside Simonelli, GE Chairman Jeffrey Immelt will serve as chairman of the board of directors of BHGE, and Martin Craigshead, former chairman and CEO at Baker Hughes, will act as vice chairman of the board.

    While that integration moves forward, business with BHGE has continued as normal so far, Elkins said.

    "We'll just proceed as usual until they tell us differently, and then we'll do as we're told," she said.

    BHGE will be continuing to push toward bringing both companies together quickly to find more opportunities for growth, the spokeswoman said.

    "We have some aggressive goals we want to meet," she said. "We're going to keep our pedal down as we always have to help our customers increase their productivity, and help them operate better in this environment. We're going to compete for that business."

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