GE to merge oil unit with Baker Hughes to create service giant

Companies argue deal predicated on return of oil to $60 a barrel combines two complementary businesses


General Electric said on Monday it would merge its oil and gas business with Baker Hughes, creating the world’s second-largest oilfield services provider as industry competition heats up to supply more-efficient products and services to the energy industry.

The deal to create a company with $32 billion in annual revenue will combine GE’s strengths in making equipment long-prized by oil producers with Baker Hughes’s expertise in drilling and fracking new wells.

GE is already the world’s largest oilfield equipment maker, supplying blowout preventers, pumps and compressors used in exploration and production. GE also has invested heavily in large data processing services just as the oil industry eyes its potential to boost oil recovery.

Baker Hughes, by contrast, is seen as one of the world leaders in horizontal drilling, chemicals used to frack and other services key to oil production.

“Both of them are quite complimentary in terms of their skills set,” GE chief executive Jeff Immelt said on CNBC on Monday. “Our oil gas customers are going to want more productivity solutions.”

Still, shares of Baker Hughes were down nearly 3 per cent, a drop that Mr Immelt and Baker chief executive Martin Craighead said likely was due to the deal’s complicated structure.

The new company will vault Baker Hughes’s market share ahead of rival Halliburton, which tried and failed to buy Baker until the deal collapsed last May, and also compete heavily with Schlumberger, the world’s largest oilfield service provider, for customers.

GE will own 62.5 per cent of the new publicly traded company. The deal is expected to close in mid 2017.

Analysts said there was little overlap between the businesses of GE and Baker Hughes that would worry regulators.

GE and Baker Hughes will talk to the Justice Department and European antitrust enforcers on Monday, according to a source close to the company. They have not yet determined how many jurisdictions they will need to file in.

GE will argue to antitrust enforcers – who stopped the deal between Halliburton and Baker Hughes just months ago – that their deal is complementary, and that they are committed to any remedy needed to win deal approval, the source said.

The deal comes at a time when North American oil and gas producers are putting rigs back to work after a near-freeze in activity caused by a slump in oil prices that began mid-2014.

But the deal is predicated on a forecast for oil prices to rise to $60 per barrel by 2019, Mr Immelt told investors on Monday morning.

“This is a very compelling time for the deal,” Immelt said, noting he expects $1.6 billion in annual cost savings by 2020.

Global oil prices have risen by a third this year to trade near $50 a barrel. – Reuters