Will improving market dynamics help the partnership?
Crude oil prices have recovered 32% since the beginning of 2016. This has positively affected the number of active crude oil rigs, which have risen 38% from May through October. Higher crude oil prices and drilling activity can benefit oilfield equipment and services (or OFS) companies’ revenues and profits. These companies have seen dismal performances over the past four quarters.
Let’s try to understand where the new Baker Hughes (BHI) will stand in the oilfield services industry based on the performances of its two founding partners: Baker Hughes and GE Oil & Gas.
BHI versus GE’s Oil & Gas business
GE’s Oil & Gas segment’s revenue fell 25% year-over-year (or YoY) in 3Q16. By comparison, BHI’s revenue fell 38% YoY in 3Q16. Clearly, GE’s Oil & Gas business managed to steady its ship better than BHI did in the quarter.
BHI’s revenue was $2.3 billion in 3Q16. GE’s Oil & Gas business’s 3Q16 revenue of $2.9 billion was higher than BHI’s. By comparison, Schlumberger’s (SLB) 3Q16 revenue of ~$7.0 billion was the highest in the industry, while Halliburton’s (HAL) 3Q16 revenue was $3.8 billion. GE makes up 1.5% of the SPDR S&P 500 ETF (SPY).
GE’s versus BHI’s operating income
Similarly, GE’s Oil & Gas segment’s operating income held up better than BHI’s. The segment’s operating income fall was 42% YoY in 3Q16. BHI’s pretax operating earnings fell to -$321 million compared to -$101 million a year ago.
Why GE’s and BHI’s operational performances varied
BHI’s Middle East and Asia region’s adjusted operating income was the most resilient in 3Q16, falling just 6.6% in the quarter compared to a year ago. BHI’s Europe, Africa, Russia, and Caspian region was still weak, falling 77% in 3Q16 over 3Q15.
Markedly lower offshore drilling activity in the Gulf of Mexico, lower drilling activity and unfavorable exchange rates in West Africa, and lower prices for BHI’s products and services in the Middle East and Asia-Pacific region affected BHI negatively in 3Q16.
Although GE’s Oil & Gas segment benefited from cost-cutting measures, it couldn’t escape the downfall either. Most of its divisions saw lower revenues, partially offset by higher downstream solutions revenue in 3Q16.
Let’s check out how BHI’s and GE’s shareholders reacted to the news of the partnership in the next article.